The Efficiency and Equity Implications of Childcare Subsidy Policies: An Equilibrium Analysis

The cost and availability of childcare are two crucial determinants of parental choices of formal childcare use and labor supply. However, previous studies of childcare subsidy policies are divided into two largely independent strands of research investigating the childcare market and individual family behavior separately. Moreover, the latter strand of research on individual family behavior almost exclusively examine how price changes affect childcare use and labor supply independently without considering that these choices are simultaneously determined within households.

This project aims to fill both gaps in the existing literature by developing an equilibrium model that considers households’ choices of labor supply and childcare use as a simultaneous decision and integrates households’ childcare choices with childcare centers’ decisions on supply to an equilibrium of the childcare market. The model will be estimated on the basis of a unique longitudinal dataset that covers formal childcare use, parental labor supply, and access to childcare services at the individual level for the entire population of the Netherlands. Identification of the model will rely on unprecedented policy variation that reduced the generosity of childcare subsidies in the Netherlands in 2012 and 2013, which enables us to make a unique contribution to the existing empirical literature that exclusively examine expansions of childcare subsidies. Moreover, by estimating a structural model with externalities through childcare supply at the neighborhood level, we are able to investigate heterogeneity in the effects of childcare subsidy reforms by not only households’ socio-demographic background but also neighborhood characteristics. Last but not least, through simulation analysis, we are also able to compare the efficacy and distributional consequences of various alternative childcare policies and evaluate specific household-based or neighborhood-based targeted childcare policies or interventions