A number of previous papers have attempted to identify the causal effects of cash transfers using instrumental variable techniques exploiting variations in cash transfers over time, household type and location. In Dahl and Lochner (2012), variations in the amount of Earned Income Tax Credit that households are eligi- ble for are exploited to identify relatively modest effects of household income on children’s test scores. They find an additional USD1,000 in current income raises combined math and reading test scores by 6 per cent of a standard deviation, with larger effects for children from disadvantaged families. Exploiting variations in Canadian child tax benefits, Milligan and Stabile (2011) find larger effects on test scores, and also identify positive effects on physical health for boys and mental health for girls.
These studies focus on the contemporaneous effects of family income on child outcomes. Yet there is a rich and well known literature on the potential for large effects from early life experiences on later childhood and adult outcomes; see Currie and Almond (2011). In Morris et al. (2005), the authors draw on seven random assignment welfare and poverty evaluations to examine the age-specific pattern of effects of welfare policies on child achievement. Earnings supplement programs are found to be most effective between ages 2 and 5 (although the treatment effect for those aged 0 to 1 is not statistically different).
The Australian Baby Bonus offers a natural experiment to identify causal ef- fects on child outcomes of family incomeat birth. Based on the existing literature, it is difficult to know a priori what kind of effect to expect from the Baby Bonus. With the full universe of test score data we have the precision to detect effects even smaller than those discussed above. The median net benefit from the Baby Bonus was around AUD1,700 (in 2004 dollars), making it larger than the afore- mentioned increases lifting test scores by several percentage points of a standard
deviation. However, the Baby Bonus was a one-off payment, whereas the increases in tax benefits were likely longer lasting (though precisely how much so is unclear). The timing of the Baby Bonus at birth could either reduce its effect – if the effect of income fades over time – or increase its effect – if early childhood is a more sensitive period with long lasting consequences (as in Morris et al. (2005)). This latter perspective is also consistent with economic models of child development with potentially large returns to early childhood investments (such as in the influ- ential work of Cunha and Heckman (2007)). The more pessimistic view of early childhood investments would leave us expecting no discernible effect from the Baby Bonus, even with the full universe of test scores. However, the more optimistic strands of the literature leave it as a real possibility, making the Baby Bonus an interesting test case.
In theory, cash transfers may influence child outcomes through a variety of mechanisms. They may directly lift investment in a child’s health and education. They may indirectly affect child development, such as through reduced parental financial stress. Harmful effects are also plausible. For example, parents may spend more on goods with spillover costs to the child (such as tobacco or alcohol). Parents may also have more children in response to the Baby Bonus, resulting in a potential quantity-quality trade-off.3 Our estimates are of the combined effect of
the cash transfer, implicitly including the individual effects of all such mechanisms. There is already a modest literature pointing to short- and long-run conse- quences of the Baby Bonus. The unintended birth shifting and associated poten- tial for harm was noted by Gans and Leigh (2009). In Drago et al. (2011), the Baby Bonus is found to have (very modestly) lifted fertility rates following its introduction. Our paper is the first looking at the net effect on child outcomes of the paymentand its unintended consequences. A concurrent working paper, Gaitz and Schurer (2017), exploits variation in sibling birthdates to isolate an exogenous
increase in family income from the Baby Bonus.4 They find no clear evidence
of an effect of the Baby Bonus on child outcomes, or on potential transmission mechanisms such as parental wellbeing, behaviour and labour supply. Their study
3Family size is not available in our data, so we cannot separately identify such effects. 4The use of sibling birthdate variation is by necessity — the cohorts in their dataset were all
born either well before or after the introduction of the Baby Bonus so it is only the siblings that allow examination of birthdates either side of the cut off.
172 5.2. BACKGROUND
is, however, constrained by the small sample sizes of only a few hundred children available in their survey data.
Examining whether the unintended birth shifting that accompanied the Baby Bonus had any effect on child outcomes is also of broad interest. There are now numerous examples of birth shifting in response to announcement effects, and the scheduling of births for a wider range of reasons is increasingly common. For ex- ample, birth delays and increases in birthweight have been identified in response to German parental leave reforms; see Tamm (2013). In the opposite direction, Schulkind and Shapiro (2014) find relatively small birth bring-forwards in response to the United States’ tax system, which are nonetheless associated with lower birth- weight and lower Agpar scores. More broadly, birth shifting has been identified by parents seeking to avoid inauspicious days and care providers wishing to avoid weekends, public holidays and conferences; see Gans and Leigh (2012); Gans et al. (2007).