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Parents typically invest both time and money in the education of their children. We study the implications for the optimal education policy of taking parental time investments in children's education into account. The children's human capital production function depends on both parental time investments and formal education, either privately purchased or publicly provided. We assume that parents differ in their unobservable ability and that the productivity of the time spent with their children depends on their ability. In the second-best, we assume that the domestic time investment is always unobservable but explore the implications of alternative assumptions on the observability of private purchases of education. We show that the sign of the cross derivative between informal and formal education plays a critical role in the second best optimal education policy.
