Liquidity Constraint and Child Labor In India: Is Market Really Incapable Of Eradicating It From Wage-Labor Households?
AbstractOne way to measure the lower steady state equilibrium outcome in human capital development is the incidence of child labor in most of the developing countries. With the help of Indian household level data in an overlapping generation framework, we show that production loans under credit rationing are not optimally extended towards firms because of issues with adverse selection. More stringent rationing in the credit market creates a distortion in the labor market by increasing adult wage rate and the demand for child labor. Lower availability of funds under stringent rationing coupled with increased demand for loans induces the high risk firms to replace adult labor by child labor. A switch of regime from credit rationing to revelation regime can clear such imperfections in the labor market. The equilibrium higher wage rate elevates the household consumption to a significantly higher level than the subsistence under credit rationing and therefore higher level of human capital development is assured leading to no supply of child labor.
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Bibliographic InfoPaper provided by University of Connecticut, Department of Economics in its series Working papers with number 2005-37.
Length: 38 pages
Date of creation: Aug 2005
Date of revision:
Note: I am really grateful to my advisors, Christian Zimmermann and Steven Ross for their guidance and valuable comments and to Prof. Samar K. Datta, IIMA, India for his help. Usual disclaimer applies.
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More information through EDIRC
Credit Rationing; Informal Credit; Child Labor; Self Revelation Mechanism;
Find related papers by JEL classification:
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
This paper has been announced in the following NEP Reports:
- NEP-AGR-2005-09-17 (Agricultural Economics)
- NEP-ALL-2005-09-17 (All new papers)
- NEP-CWA-2005-09-17 (Central & Western Asia)
- NEP-DEV-2005-09-17 (Development)
- NEP-DGE-2005-09-17 (Dynamic General Equilibrium)
- NEP-ENT-2005-09-17 (Entrepreneurship)
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