Borrowing Constraints, Child Labor and Welfare

Journal of Public Economics, 1988

Bequest constraints have played a major role in discussions of debt neutrality but their welfare implications were not sufficiently dealt with in the literature.

RePEc: Research Papers in Economics, 2018

This paper builds an overlapping generations household economy model where child labour is present. We argue that the degree of parental altruism is determined by the level of schooling of the parent. A more educated parent has more willingness to invest in human capital formation of child. These differences in preferences of parent towards offspring's schooling bear significant effects on the long run dynamics of schooling. In this context, we study the efficacy of child labour ban visa -vis education subsidy in enhancing schooling and reducing child labour. In an extension of the basic model, we also study the dynamics of schooling in the presence of learning by doing effect in unskilled work.

2010

This paper introduces an overlapping-generations model with earnings hetero-geneity and borrowing constraints. The labor income tax and the allocation of tax revenue across social security and forward intergenerational public goods are determined in a bidimensional majoritarian voting game played by successive gen-erations. The political equilibrium is characterized by an ends-against-the-middle equilibrium where low- and high-income individuals form a coalition in favor of a low tax rate and less social security while middle-income individuals favor a high tax rate and greater social security. Government spending then shifts from social security to public goods provision if higher wage inequality is associated with the borrowing constraint and a low interest-rate elasticity of consumption.

Journal of Monetary Economics, 1989

We show how borrowing constraints, intergenerational altruism, and their interaction shape the aggregate savings response to government debt and fiscal policies that redistribute resources between living generations. We also characterize the conditions under which borrowing constraints bind and the altruistic transfer motive operates in terms of the strength of the altruism motive, the shape of the lifetime productivity profile, the willingness to substitute consumption intertemporally, and other factors. Finally, we characterize the dynamic response of aggregate savings to nonneutral government debt policies in economies with binding borrowing constraints.

SSRN Electronic Journal, 2016

T his paper investigates the tim ing of w ealth transfers betw een generations. W e develop an overlapping generations m odel in w hich each generation can borrow against its future incom e but not against expected bequest. A s a result, generations relatively poorer than their parents m ay end up not sm oothing consum ption. W e prove that if w ealth transfers can take place earlier in life, then each generation sm ooths consum ption despite the constraint on borrow ing and the first best solution is restored. T he m odel im plies that parents transfer resources w hen the children are credit constrained. T his im plication is tested using D utch survey data on households' intentions to m ake intervivos transfers m atched w ith adm inistrative data that allow to construct a m easure of the probability of being in need of a transfer. A ll in all, the paper highlights the im portance of intervivos transfers as a device that households can resort to in order to m itigate inter-generational w ealth inequalities. K e y w o r d s intervivos transfers, credit constraints, overlapping generations JEL Codes

The Review of Economic Studies, 2011

We discuss a simple model of intergenerational transfers with one-sided altruism: parents care about their child but the child does not reciprocate. Parents and children make investments in the child's education, investments for other purposes, and parents can transfer cash to their child. We show that for an identifiable set of parent-child pairs, parents will rationally under-invest in their child's education. For these parent-child pairs, additional financial aid will increase educational attainment. The model highlights an important feature of higher education finance, the "expected family contribution" (EFC) that is based on income, assets, and other factors. The EFC is neither legally guaranteed nor universally offered: Our model identifies the set of families that are disproportionately likely to not provide their full EFC. Using a common proxy for financial aid, we show, using of data from the Health and Retirement Study, that financial aid increases the educational attainment of children whose families are disproportionately likely to under-invest in education. Financial aid has no effect on the educational attainment of children in other families. The theory and empirical evidence identifies a set of children who face quantitatively important borrowing constraints for higher education.

2018

Parental transfers towards the education of children are non-trivial, especially in countries, characterized by both imperfect credit markets and high economic growth rates. In this paper, we analyze the role of parental altruism on economic growth and dynamic efficiency, especially when credit markets for education loans are missing. We demonstrate conditions under which missing or imperfect credit markets increase economic growth and do not hinder dynamic efficiency. We also show that a newly constructed index of parental altruism, orthogonal to income effects, exhibits high cross-country correlations with model-implied measures of parental altruism at different levels of credit market development. JEL Classification Codes: I25, O16, O41

2004

In this paper we construct a dynamic heterogeneous agent general equilibrium model to quantify the effects of child labor legislation on human capital accumulation and the distribution of wealth and welfare. Crucial model elements include a human capital externality in the market sector, an informal home production sector in which child labor laws cannot be enforced, uninsurable idiosyncratic income risk, borrowing constraints, and endogenous wage and interest rate determination in general equilibrium. We calibrate the model to US data around 1880 and find that the welfare consequences for individual households of a transition to policies that restrict child labor or provide tax-financed free education depend crucially on the main source of a households' income. Whereas households with significant financial asset holdings unambiguously lose from any government intervention, high-wage workers benefit most from a ban on child labor, while low-wage workers benefit most from free education. Based on a utilitarian social welfare function, the introduction of free education results in substantial welfare gains, in the order of 3% of consumption, mainly because it leads to higher human capital accumulation. A child labor ban, in contrast, induces (small) welfare losses because it reduces income opportunities for poor families without being effective in stimulating education attainment.

Economica, 2003

Due to the presence of borrowing constraints in the market, the cost of educating the young members of a family is often borne by the adults. We consider intrafamily financing of human capital under the assumptions that individuals are selfish and binding contracts are not feasible. Cooperation among family members is possible through a family norm (a family "social capital") which prescribes the obligations to be met at each stage in life and sanctions for those who deviate. We characterize the set of self-enforcing transfers and show that there is a downward bias in the family provision of education. This gives a rationale for public action as a remedy to the lack of commitment between selfish family members.

Journal of Economic Dynamics and Control, 2006

In this article we provide a model of growth with endogenous fertility in which multiple steady states derive from the modelling of household liquidity constraints. We put forward an innovative approach to the finance of higher education by assuming that youths can borrow because their parents guarantee the loan repayment with their income. Young individuals can renege on their debt and lenders provide them credit only up to an amount which is commensurate to a collateral provided to children by their families. Parents care about children's education and choose a collateral which depends positively on family income and negatively on family size. A stable trap of low-development is characterized by high-fertility rates and low investment in human capital. On the other hand, in economies with a sufficiently low starting rate of fertility borrowing constraints gradually vanish and the process of growth reaches a steady state characterized by the optimality of fertility and schooling choices. Government subsidies to education may reduce population growth and promote human capital investment if fertility at steady states is lower than thresholds. r 2004 Elsevier B.V. All rights reserved. JEL classification: O41; O15; J13