Rate of Return FAQ

When asked to invest in a product or company, any good entrepreneur will ask, “What is the rate of return on the investment?” By extension, any good society should look at the rate of return to investment in social programs. We have estimated that the rate of return to quality early childhood education is 7 to 10 percent per annum, which is much higher than the rate of return on stocks in the American economy between 1945 and 2008. Unlike most other investments, there is no equity-efficiency trade off for programs targeted toward the early years of the lives of disadvantaged children. Investment in early childhood education tackles inequality while promoting productivity at the same time.

"How is the return per $1 invested in human capital interventions by age of intervention calculated?"

The internal rate of return of a program has the exact same definition for any program to be evaluated. It is obtained based on calculating the benefits of the program net of their costs.

"How do you calculate benefits?"

By benefits we mean the difference between many variables of interest between the treatment and control groups of any program, i.e. people who received the program and people who did not. Examples of these variables are lifetime income, expenditure in health, welfare transfers, etc.

"How do you calculate costs?"

The calculation is analogous for the costs. Importantly, even when they do not enter into the program they do incur in some costs which are accounted for. An example of a cost for the control group would be the alternative preschool that mother take the children to when not admitted into the program.

"Were the measures of return similar to those you tracked in your analysis of the Perry Preschool Program?"

The evidence suggests that the earlier the program, the greater the rate of return. For the case of Perry, we calculated that the internal rate of return of the program is around 7 to 12 percent.