Credit constraint and human capital investment: an empirical analysis using Brazilian household budget survey

This article is a first step towards understanding the relationship between credit market imperfections and inequality of opportunity in skill formation. The main goal is to investigate the effects of the credit constraint on the optimal human capital decision, in terms of degree of schooling, taking into account the household preferences for education. Our starting point is a theoretical model of human capital investment decision with credit constraint. Following a previous model in the literature, we propose a reduced-form approach that estimates the relation between education decision and initial wealth in Brazil. Our empirical analysis is conducted using data from a Brazilian Household Budget Survey (Pesquisa de Orçamentos Familiares), for years 2002–2003 and 2008–2009. Our results point out that education decision is in fact credit constrained. The empirical results show a strong and highly significant effect of wealth on educational level of children, teenagers and adults, even controlling by education expenditures. But we find no evidence of credit constraint on high level education decision, like undergraduate and graduate levels.