Regular article
Labeled loans and human capital investments

https://doi.org/10.1016/j.jdeveco.2023.103053Get rights and content
Under a Creative Commons license
open access

Highlights

  • Take-up of lumpy human capital investments can be increased by labeled microcredit.

  • Sensitivity to loan labels plays an important role in household investment choices.

  • Not all labeled loans convert into investments intended by the loan label.

  • New labeled loans can lead to substitution away from other labeled loans

  • A theoretical model and experiment in India demonstrate loan label sensitivity.

Abstract

Imperfect capital markets and commitment problems impede lumpy human capital investments. Labeled loans have been postulated as a potential solution to both constraints, but little is known about the role of the label in influencing investment choices in practice. We draw on a cluster randomized controlled trial in rural India to test predictions from a theoretical model, providing novel evidence that labeled microcredit is effective in influencing household borrowing and investment decisions and increasing take-up of a lumpy human capital investment, a toilet.

JEL classification

O16
D14
G41
H24
I12
I38

Keywords

Credit constraints
Microcredit
Labels
Commitment device
Fungibility
Sanitation
Subsidies

Data availability

Data will be made public in the near future

Cited by (0)

This paper combines two separately circulated drafts (‘Labeled Loans and Human Capital Investments’ and ‘Scaling up Health Promoting Investments: Can Microcredit Support Public Health Subsidy Programs?’). We thank first and foremost Orazio Attanasio, without whose ongoing support this paper would not have been possible. We also thank I. Almås, S. Bhalotra, I. Clots-Figueras, M. Ghatak, I. Rasul, N. Hermes, F. Lenel, F. Bedecarrats, N.M. Filho, A.M. Ibanez, participants at the EDePo seminar, Kent, UNU-WIDER conference, Oslo Microfinance Workshop, ISI Delhi Conference, CERMi, CSAE and RES Conferences, EDePo-STICERD, Bristol EPIB, and LACEA-BRAIN workshop, the CSAE Seminar series, and NEUDC for useful discussions and suggestions. F. Brugues, B. Perez-Viana, J. Maywald and S. Crossman provided excellent research assistance. We thank the implementing agency for their cooperation and endless patience through the project. All errors are our own. We are also indebted to study participants for their willingness to contribute to the study. We gratefully acknowledge financial support from the World Bank Strategic Impact Evaluation Fund and the Economic and Social Research Council’s Centre for the Microeconomic Analysis of Public Policy at the IFS (grant no. ES/T014334/1). Ethics approval was secured from the University College London Research Ethics Committee (application no. 2168/008); and from the Institutional Review Board of The Institute of Sustainable Development, Chennai, India. The evaluation is registered in the AEA Trial Registry, AEARCTR-0001955.