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Loan Regulation and Child Labor in Rural India

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  • Basab Dasgupta
  • Christian Zimmermann

Abstract

We study the impact of loan regulation in rural India on child labor with an overlapping-generations model of formal and informal lending, human capital accumulation, adverse selection, and differentiated risk types. Specifically, we build a model economy that replicates the current outcome with a loan rate cap and no lender discrimination by risk using a survey of rural lenders. Households borrow primarily from informal moneylenders and use child labor. Removing the rate cap and allowing lender discrimination markedly increases capital use, eliminates child labor, and improves welfare of all household types.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3992.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3992

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Keywords: child labor; India; informal lending; lending discrimination; interest rate caps;

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  1. Ranjan, P., 1999. ""Credit Constraints and the Phenomenon of Child Labor"," Papers, California Irvine - School of Social Sciences 98-99-12, California Irvine - School of Social Sciences.
  2. Duryea, Suzanne & Lam, David & Levison, Deborah, 2007. "Effects of economic shocks on children's employment and schooling in Brazil," Journal of Development Economics, Elsevier, Elsevier, vol. 84(1), pages 188-214, September.
  3. Lorenzo Guarcello & Fabrizia Mealli & Furio Rosati, 2010. "Household vulnerability and child labor: the effect of shocks, credit rationing, and insurance," Journal of Population Economics, Springer, Springer, vol. 23(1), pages 169-198, January.
  4. Robin Burgess & Rohini Pande, 2005. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 780-795, June.
  5. Pallage, Stephane & Zimmermann, Christian, 2007. "Buying out child labor," Journal of Macroeconomics, Elsevier, Elsevier, vol. 29(1), pages 75-90, March.
  6. Beegle, Kathleen & Dehejia, Rajeev H. & Gatti, Roberta, 2006. "Child labor and agricultural shocks," Journal of Development Economics, Elsevier, Elsevier, vol. 81(1), pages 80-96, October.
  7. Karan Singh, B, 2011. "Impact of adverse economic shocks on the Indian child labour market and the schooling of children of poor households," MPRA Paper 30958, University Library of Munich, Germany.
  8. Eric V. Edmonds, 2004. "Does Illiquidity Alter Child Labor and Schooling Decisions? Evidence from Household Responses to Anticipated Cash Transfers in South Africa," NBER Working Papers 10265, National Bureau of Economic Research, Inc.
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