The Nurture of Nature and the Nature of Nurture: How Genes and Investments Interact in the Formation of Skills

69 Pages Posted: 13 Oct 2020

See all articles by Mikkel Houmark

Mikkel Houmark

Aarhus University

Victor Ronda

Johns Hopkins University Department of Economics

Michael Rosholm

Aarhus University - Department of Economics and Business Economics; IZA Institute of Labor Economics; Amternes og Kommunernes Forskningsinstitut (AKF)

Abstract

It is widely recognised that genetics and family investments both matter for children's development. However, the two are often treated as separate factors where the higher importance of one implies a lesser role of the other. In this paper, we challenge this view and show that genes and family resources are closely interrelated in the process of skill formation. We incorporate genetic endowments into a dynamic latent factor model, as in Cunha and Heckman (2008). The model allows us to identify different genetic mechanisms and control for measurement error in skills and investments. To identify the independent effect of a child's genes, we explicitly control for parental genes. We exploit the fact that conditional on parental genes, variation in children's genes is random. Using a longitudinal British data set, the Avon Longitudinal Study of Parents and Children (ALSPAC), we document the importance of three distinct genetic mechanisms: the direct effect of child genes on skills, the indirect effect of child genes via parental investments (nurture of nature), and the effect of parental genes on parental investments (nature of nurture). Using two counterfactual simulations, we argue that the existence of genetic effects is not at odds with the value of social policies in reducing inequality in skills. In fact, we show that the relative importance of genes depends on how parental (or public) investments are allocated across children. Thus, skill disparities due to genetic differences may be mitigated via social policy.

Keywords: skill formation, dynamic factor analysis, social science genomics, ALSPAC

JEL Classification: D10, I24, J13, J24

Suggested Citation

Houmark, Mikkel and Ronda, Victor and Rosholm, Michael, The Nurture of Nature and the Nature of Nurture: How Genes and Investments Interact in the Formation of Skills. Available at SSRN: https://ssrn.com/abstract=3708642 or http://dx.doi.org/10.2139/ssrn.3708642

Mikkel Houmark (Contact Author)

Aarhus University

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

Victor Ronda

Johns Hopkins University Department of Economics ( email )

3400 Charles Stree
Baltimore, MA 21218-2685
United States

Michael Rosholm

Aarhus University - Department of Economics and Business Economics ( email )

Fuglesangs Allé 4
Aarhus V
Denmark
+45 89 42 15 59 (Phone)
+45 86 13 63 34 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Amternes og Kommunernes Forskningsinstitut (AKF)

Nyropsgade 37
Copenhagen, DK-1602
Denmark

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