In impoverished societies a shock to the household’s resources often results in a decision to reduce the
contemporaneous investment on children’s education. Although such shocks may be transitory in nature they could
lead to permanent long run effects in terms of reduced human capital for future generations thus further enhancing a
state of deprivation. This paper models the long-run effects of productivity shocks using a micro-economic founded
life-cycle model where investment uncertainty faced by heterogeneous households plays a crucial role with regards
to optimal educational choices for their primary school age children. The dynamics in the structural model provide
the basis for identification and estimation of endogenous human capital formation allowing for household’s
heterogeneity, a concept often missing from empirically implemented macro-models of growth. The empirical
section illustrates the modelling strategy and estimation procedure using data from Tanzania (The Kagera Health and
Development Survey, 1991-1994). The results suggest that primary school age orphans that attend school regularly
can experience gains in human capital (i.e., productive capacity within the household) that are 6.2% higher than
similar orphans in a non-schooling regime. Howerver, when one or both parents are present to bring up the children,
the gains that result from attending school are small when we compared these to the human capital gains that result
from intergenerational transfers,i.e., gains purely from knowledge transfers between generations.