The first objective of this research is to offer a theoretical framework to analyze the family investment in human capital which considers whether parents assume their children's schooling to be consumption, or investment, or both. The theory captures the impact of subsidies for schooling, and the impact of the income tax. The second objective is to provide empirical tests using Indonesian data focus on the differences among income groups in investing in schooling and the differences in this decision as between primary and junior secondary levels of education.
The model that is developed here is an intergenerational life-cycle model which is dynamic in nature. There are six basic assumptions of the model. First, the unit analysis is the family and parents are the decision maker for the family. Second, the time period is that of the parents' lifetime. Third, there is no market for borrowing or lending for purposes of financing human capital investment. Fourth, the financial sources for children's schooling therefore are parents' disposable income, the children's disposable income, and government subsidy. Fifth, the costs of education are including both the direct costs and the indirect costs. Sixth, the interest rate for consumption purposes, r, is exogenous.
The empirical results are obtained by using two Indonesian cross-section data sets, the 1992 National Socio-Economic Survey and the 1992 National Labor Force Survey. Three methods of estimation are used, two-stage logistic regression, the Cox-Proportional Hazard Method and two-stage least squares.
The results conclude that: first, the family in Indonesia regards their demand for children's schooling not only as a consumption good but also as an investment for the family. Therefore, the children's expected earnings are very important factors in the household decision concerning children's formal schooling in primary and junior secondary school. Second, the higher the tuition and fees, the lower both the probability of enrollments in school and the duration of schooling. The sensitivity of this probability of enrollment and duration to tuition is greater in the lower income groups. These effects also are stronger at the junior secondary level, where fees in general has been higher.