Loan Regulation and Child Labor in Rural India
FRB of St. Louis Working Paper No. 2012-027A
24 Pages Posted: 20 Aug 2012
Date Written: August 1, 2012
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.
Keywords: child labor, India, informal lending, lending discrimination, interest rate caps
JEL Classification: O16, O17, E26
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