Liquidity constraints might lead to children quitting school, even if the long run
returns to schooling justify the investment. This study empirically tests for the
existence of such liquidity constraints, by evaluating a policy decision that increased
child allowances paid to Arab families in Israel during the 1990s. The identi.cation
strategy is based on the fact that the increase in the allowance to households with 4 or
more children was much larger than the increase for households with 3 children. Using
difference-in-differences methodology, I .nd that the increased allowance signi.cantly
raised high-school attendance of girls with low socioeconomic status, due partly to
a decrease in their employment: An increase of 1% in family income as a result of
the increase in the allowance led to an increase of more than 2 percentage points in
school attendance. This evidence suggests that direct cash transfers to poor families
in advanced economies can enhance the human capital accumulation of their children,
even if the transfers are not conditioned on education.
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