Bounded rationality, expectations, and child labour

This paper develops a model with overlapping generations, where the household's optimal fertility, child labour, and education decisions depend on the parents expectations or beliefs about the return to education. It is shown that there exists a range of parental income where the fertility rate is high and children participate in the labour market and receive an incomplete education <i>if</i> a parent believes the return to education is low. The act of participating in the labour market reduces the child's ability to accumulate human capital; thus, the action of sending a child into the labour market is sufficient to ensure that the parents initially pessimistic expectations are fulfilled. It is then shown that a onetime policy intervention, such as banning child labour and mandatory education, can be enough to move a country from the positive child labour equilibrium to an equilibrium with no child labour.