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Loan Regulation and Child Labor in Rural India

Author

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  • Dasgupta, Basab

    () (World Bank)

  • Zimmermann, Christian

    () (Federal Reserve Bank of St. Louis)

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.

Suggested Citation

  • Dasgupta, Basab & Zimmermann, Christian, 2012. "Loan Regulation and Child Labor in Rural India," IZA Discussion Papers 6979, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp6979
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    References listed on IDEAS

    as
    1. 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;European Society for Population Economics, vol. 23(1), pages 169-198, January.
    2. Ranjan, Priya, 2001. "Credit constraints and the phenomenon of child labor," Journal of Development Economics, Elsevier, vol. 64(1), pages 81-102, February.
    3. Pallage, Stephane & Zimmermann, Christian, 2007. "Buying out child labor," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 75-90, March.
    4. 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.
    5. Robin Burgess & Rohini Pande, 2005. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," American Economic Review, American Economic Association, vol. 95(3), pages 780-795, June.
    6. Duryea, Suzanne & Lam, David & Levison, Deborah, 2007. "Effects of economic shocks on children's employment and schooling in Brazil," Journal of Development Economics, Elsevier, vol. 84(1), pages 188-214, September.
    7. Beegle, Kathleen & Dehejia, Rajeev H. & Gatti, Roberta, 2006. "Child labor and agricultural shocks," Journal of Development Economics, Elsevier, vol. 81(1), pages 80-96, October.
    8. 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.
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    More about this item

    Keywords

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

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, 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

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