Preschool teachers or caregivers reading to children


(The Center for High Impact Philanthropy)

April 8, 2015

Investing in Kids Can Yield High Returns: Q&A with Lynn A. Karoly

Photo by Christopher Futcher/iStock

Lynn A. Karoly, PhD, is a senior economist at the RAND Corporation, professor at the Pardee RAND Graduate School, and has written extensively on the topic of economic returns to early childhood programs.

What is one thing you would like donors interested in early childhood to know about the potential economic benefits associated with funding early childhood programs?

The first point I would make is that there is strong evidence of large potential economic returns to investing in high quality early childhood programs. But, that evidence, while very solid, doesn't necessarily mean that every early childhood program will generate equally large returns. The evidence of substantial potential returns comes from high quality programs that often require a significant investment per child to implement. It can be tempting to think, “If it worked in that setting for a given expenditure per child and they achieved a strong economic return, maybe I can fund a program that costs half as much per child (because we don't have the resources required to fund the more costly program) and still get half as much benefit.” But here's where donors need to be cautious. Many programs likely have a “threshold” of quality and intensity that you need to achieve if you are going to register positive returns. A related point is that the evidence regarding the strongest returns generally comes from programs working with children most at risk or who face the most disadvantages. That doesn't mean that there may not be benefits to providing a program to children with more diverse backgrounds or for all children, but the returns per child served are not likely to be as high.

How does an “investment” in early childhood differ from other financial investments? Are there any common confusions or misperceptions about the returns to such investments?

Major differences include the time horizon, who benefits (stakeholders), and the level of uncertainty about returns:

  • Compared to many financial investments, investments in early childhood have a long time horizon. The economic returns of investments at the earliest years of children's lives often occur later as they age, and show up in results such as fewer assignments to special education, reduced grade repetition, higher rates of high school graduation, and better social outcomes (for example, less involvement in crime). It takes time for these benefits to add up, and the “break even” point may not occur for 5, 10 or 15 years.

  • The second difference is that when economists look at return on investment, we look broadly at returns to society as a whole, which consists of distinct stakeholder groups. We tally up these benefits that may be realized by different groups (including direct program beneficiaries, the government, and other individuals who may benefit indirectly) and look at benefits holistically as a social good. A more traditional financial investor is more likely to concentrate on the expected benefit to him or herself individually, as opposed to what kind of payback could accrue to the public sector or society at large.

  • The last difference points to a common misperception about estimates for return on investment to social programs. A question I often get is “can you just tell me the number — what's the return on investment going to be?” As economists, we know there is a lot of uncertainty around the kinds of estimates and assumptions we make, which is why you often see the estimated rate of return of a program reported as a range. This is different from financial investments where you can sometimes be much more precise about the expected monetary benefits. People also often want to compare programs based on estimated returns. That's great if you are really able to make an apples-to-apples comparison, but that's not often the case. Sometimes the methodologies used to make the estimates differ; sometimes the underlying metrics used to evaluate programs can differ; sometimes a program may have simply not had the means to track a potential benefit and so may appear less worthy than a program that did. I like to think of return on investment analyses as more “proof of the principle” that a given program can generate economic returns, rather than a ruler or metric to be able to compare across programs. Returns can also vary for the same program based on the context in which it is being implemented or the population being served.

Do you have additional advice for donors who care about impact, and who might be choosing between different early childhood programs? How might research on the costs and benefits associated with different programs play into these decisions?

Continuing from the last point, it makes sense to think about your specific objectives or area of interest, the populations you are hoping to serve, and other aspects of the context the program will be working in. I also think it is important to consider the evidence base as much as possible. One approach is to choose a proven program model and implement it with fidelity. If implementing a particular proven model in the given context is not possible, donors can still look for programs that reproduce key features or elements of programs that have been proven to be effective. And in addition to drawing from the evidence base, it is also important to contribute further to our knowledge of effective programs, through ongoing monitoring and evaluation of new program models or scale-up of proven programs. Ultimately, monitoring and evaluation is simply good practice for ensuring the quality of programs that are implemented and for verifying that you are obtaining the results you seek.

In terms of resources that investors can use to find programs that have an evidence base, the Center's work is clearly one; there are also clearinghouses that have useful information about what has been proven to work. These include:

Anything else you would like to add?

Investing in early childhood programs has strong appeal for policymakers in the public sector, as well as investors in the private sector. I think there is tremendous opportunity for public-private partnerships with such investments, taking advantage of some of the newer funding mechanisms like Social Innovation Fund grants, social impact bonds, and other pay-for-performance mechanisms. These vehicles have the potential to unite the private donor community, non-profit sector, and government in realizing the economic and social returns to early childhood investments.