Working Paper: NBER ID: w7225
Authors: David M. Blau; H. Naci Mocan
Abstract: We use data from a sample of day care centers to estimate the relationships between cost and the quality of the child care service provided, and between revenue and quality. We use a measure of child care quality derived from an instrument designed by developmental psychologists. This measure of quality has been found to be positively associated with child development. Taking the estimated cost-quality and revenue-quality relationships as given, we then estimate the objective functions of the firms and compute the supply function for quality. The results indicate that (1) the estimated cost function is inconsistent with the implications of cost-minimization; (2) for-profit firms operate at a positive level of marginal cost, but non-profit firms operate at zero or negative marginal cost; (3) revenue is positively but weakly associated with quality; and (4) the supply of quality is inelastic, with point estimates of the supply elasticity of .04-.05 for both for-profit and non-profit firms. Implications of the results for child care policy are discussed.
Keywords: No keywords provided
JEL Codes: J13; L2; L3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Operational practices of firms (L21) | Inefficiencies in cost management (D61) |
| For-profit firms (L21) | Positive level of marginal cost (D40) |
| Nonprofit firms (L39) | Zero or negative marginal cost (D40) |
| Revenue (H29) | Quality (L15) |
| Price changes (P22) | Quantity of quality supplied (L15) |