Unintended Consequences of a Well-Intentioned Policy: Impact of Credit on Child Labor in Bangladesh

Canonical models of credit suggest that relaxing credit constraints can increase human capital investment in children. However, when credit brings new business opportunities within reach in economies with many labor market frictions, increased access to credit might increase the use of child labor by increasing the opportunity cost of a child’s time. In this study, I use data from a randomized controlled experiment to examine the effect of an agricultural credit expansion program in Bangladesh and find an increase in child labor. I present evidence that this increase in child labor is due to a rise in new opportunities for children to work in household self-employment activities. I also find that treated households with fewer working adults use more child labor and spend less on education. While I do not see any effect on schooling outcomes, the time budget survey reveals that children from treated areas spend significantly less time studying. Overall, these findings raise concerns about the unintended intergenerational consequences of easing credit constraints to increase self-employment.