Intergenerational transmission of skills during childhood and optimal public policy

We characterize the optimal tax policy and quality of day care services in an OLG model in which child care arrangements chosen by parents of different skill type affect the probability that children become high-skilled adults in a type-specific way. With respect to previous contributions, optimal tax formulas incorporate type-specific Pigouvian terms which correct for the intergenerational externality in human capital accumulation. The optimal quality of day care services is determined by equating the total private marginal benefits of a quality increase to its marginal cost, adjusted for the presence of three additional terms capturing respectively the budgetary impact of a change in demand for day care services, the intergenerational externality in human capital accumulation, and the self-selection constraint.