Fall 1999
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Any parents who pay their children an allowance, or who worry if their kids are learning important lessons about saving money, might think that studying children's economic behavior is an obvious idea. But until recently the subject has never been systematically explored, according to William Harbaugh, an assistant professor of economics at the University of Oregon.
When Harbaugh was in graduate school, he and classmate Kate Krause were the only students with young children. They would jokingly tell their friends that they were using their children as research subjects for a paper on "Economic Experiments that You Can Perform at Home on Your Children." When colleagues told them the idea was a good one, Harbaugh and Krause took the encouragement to heart.
"The textbook definition of economics," Harbaugh says, "is the study of rational agents with insatiable desires and limited resources. Every parent agrees that at least the last two parts of the definition apply to children. Rationality, on the other hand, is an open question."
So he and Krause, who teaches at the University of New Mexico, began studying rational behavior in children. Their research revealed that even six-year-olds demonstrated the decidedly rational and adult behavior of changing their consumption choices as prices change.
"It's sort of surprising. These are kids that can't even count reliably yet they have very little trouble making some pretty complicated choices in a rational way," Harbaugh says.
In one experiment Harbaugh measured what could be called a "savings threshold," the amount of reward children need to be given for them to delay the gratification of consumption. Few parents will be surprised to hear that it's an astonishingly high amount -- 100 times more than most adults require.
"Sometime between the age of six and the age of twenty-six, the rate of return you need to pay people in order to get them to save for the future falls by 100 times. It's a huge change," explains Harbaugh.
To put the importance of this "savings threshold" in perspective, consider that if it fell even slightly more between childhood and adulthood, adults wouldn't be borrowing on their credit cards as they do. If the threshold fell slightly less, adults might choose not to go to college; they'd rather take smaller incomes now than delay their gratification until after college when they would likely earn more.
"Economists simply have no idea why this very basic preference changes so much, and yet not more," he states. "If there is an answer, I think it's to be found by studying children."
While this behavior changes as children grow, other behaviors seem to be fixed at an early age. Economists studying altruism in adults have found that in experimental settings adults given items of value are willing to give away about 30 percent of these items.
"We ran these same experiments with kids and got very similar behavior," Harbaugh says. "So, whatever it is that determines altruism, much of it has already taken place by the time the child reaches the age of six."
Harbaugh and Krause have plans to continue their exploration of children's economic behavior. One project will study how parents can use allowances to teach their children about saving, bargaining, and working. Should parents tell their kids they have to save or require that they put some money aside for charity? Should parents pay children allowances only if the kids do their chores?
"As a dad I've struggled with these sorts of issues, with a gut feeling that they might really affect how my children will deal with money as an adult," Harbaugh says. "Yet despite all the anecdotes addressing these questions in children's magazines, there's almost no well-designed research on how this sort of family economic policy affects children's behavior."