Borrowing Constraints, Parental Altruism and Human Capital Accumulation

This paper investigates the impact of borrowing constraints on human capital accumulation and welfare. In a standard overlapping-generations model where parental altruism results in transfers that children allocate to consumption and education, the average level of welfare is higher when children cannot borrow against future income. The imposition of borrowing constraints increases parental transfers and raises children’s welfare. Additionally, the ability to borrow helps children fund higher levels of education therefore increasing the aggregate level of human capital while borrowing constraints raise aggregate savings and, hence, physical capital. The latter effect dominates and, when prices are flexible, it augments the positive welfare impact of the credit constraint