Chapter 73. Investment in EducationInputs and Incentives

From the point of view of economic development, education is the acquisition of knowledge and skills through experiences from conception onwards over the life cycle that increase productivity broadly defined. Education can occur through, but is not limited to, formal educational activities such as preschool programs, schools, and formal training programs. The proximate determinants of education are experiences or inputs into knowledge and skills production functions. Within a dynamic forward-looking model of human capital investments, these experiences are determined sequentially by a series of family or individual decisions given past, current and expected future resources, markets, policies, and other institutions. The context in which these microinvestment demands are made, in turn, reflects decisions of suppliers of services that are explicitly related to education as well as of options that may be importantly related to education through other experiences, such as in labor markets. To understand the nature of inputs and incentives related to education in developing countries, attention must be paid to both the demand and the supply sides for investments in education, both of which are conditioned significantly by policy choices. Therefore, there are numerous important policy questions related to educational inputs and incentives. What are critical inputs into different educational processes? How important are various incentives for improving these inputs? How effective are various demand-side policies versus supply-side policies? How important are policies that have direct impact on input decisions versus policies that alter longer-run incentives to invest in current education through altering expected longer-run returns from such investments? What are the benefits relative to the resource costs of alternative policies for improving educational inputs? This chapter assesses the current state of empirical knowledge, and gaps in that knowledge, on educational incentives and inputs in developing countries as related to such questions.