A growing body of research suggests that experiencing adversity during childhood persistently impedes a range of economic and social outcomes.  Mental health and substance use (MHSU) disorders are understudied in this literature, however, perhaps due to data availability.  This study aims to address this dearth in the literature by examining the impact of experiencing a negative human capital shock before age five on adult mood, anxiety, and substance use disorders. 

Understanding determinants of MHSU disorders is not of interesting simply for understanding how a particular outcome is influenced by early childhood adversity.  Instead, this knowledge is important for prioritizing public healthcare expenditures.  Unlike other areas of health, the majority of MHSU treatment services in the U.S. are covered by government, and annual costs are predicted to reach $239 billion by 2014.  Moreover, the full costs to society of MHSU disorders likely extend beyond treatment costs to general healthcare, crime, and productivity. 

To identify the effect of childhood adversity we exploit plausibly exogenous variation in natural disasters as measured by a serious tornado, flood, fire, earthquake, or hurricane.  We utilize these disasters as proxies for negative human capital shocks as they may impede access to proper nutrition and medical services, directly or indirectly lead to physical injuries, and increase mental stress for both the child and his caregiver.  To this end we make of the National Survey of Alcohol and Related Conditions (NESARC) that is specifically designed to study MHSU disorders and their risk factors.  

Models of intra-household resource allocation suggest that parents play an important role in the importance, and persistence, of childhood adversity.  In particular, when faced with a child who has experienced adversity that influences the stock of human capital and/or returns to future human capital investments, may alter their investments in the child.  Few studies have assessed the role of parental investments in early childhood adversity as data on investments is scarce.  Moreover, the inability to control for parental response can lead to biased estimates of the impact of childhood adversity.  To shed light on this important question, we utilize unique information available in the NESARC on multiple proxies for parental investments to provide evidence on how parents respond to adversity experienced by their children.

Our findings suggest that experiencing adversity before age five substantially increases the risk of all MHSU disorders we study.  Turning to parental response, we find that parents reinforce adversity in that they are more likely to display abuse/maltreatment and neglect towards children.  We find that parents behave neutrally in terms of emotional support investments, however. 

Taken together, our findings suggest that adversity experienced during childhood negatively impacts adult MHSU disorders, parents adopt a mixed strategy in response to adversity experienced by their children, and estimates that do not consider parental responses likely overstate the biological effect.  Policies that target both childhood adversity and natural disasters may be an effective strategy to offset future costs attributable to MHSU disorders.