Equity and Efficiency of Childcare Subsidies: A Structural Approach


Childcare policies improve the compatibility of family & career and can increase maternal life cycle earnings & tax payments. How much should childcare be subsidized given this fiscal externality? How should subsidies vary with income? We estimate a dynamic discrete choice model of labor supply and childcare decisions of heterogeneous families with German panel data. We evaluate a recent expansion of public childcare slots and find that this program paid for itself through the fiscal externality. Increasing subsidies further by marginally lowering fees per slot would only be 6% self-financing. Increasing redistribution with more progressive subsidies comes at low efficiency costs.