The prevalence of poverty in advanced economies represents a challenge, both to economic theory and to society. We know that poverty is perpetuated by low levels of educational investment amongst disadvantaged children, but we have no credible theoretical explanation for the observed degree of that apparent underinvestment, and we have not yet developed sufficient policy tools to break the intergenerational cycle of deprivation. In response, this thesis undertakes theoretical and empirical analyses of the pathways that perpetuate poverty. I demonstrate that divergently low educational investment could arise as an equilibrium response to a grades-focussed educational system; I develop the existing state-of-the-art technique in econometric estimation of the educational production function; and I apply that technique to find strong empirical support for my theoretical model. In addition my results show that the average child’s propensity to think analytically has a substantial influence over their developmental pathway, which suggests that models of educational investment should adopt a generalisation of Expected Utility Theory that allows agents to maximise one of two possible objective functions
