Safety Nets, Credit, and Investment: Evidence from a Guaranteed Income Program

Abstract

Do safety nets affect investment? If so, how? Combining a natural experiment that gives guaranteed income to landowning farmers in India with transaction-level bank data and loan-level credit bureau data, we evaluate the impact of unconditional and perpetual guaranteed income on small farmer entrepreneurs. We find that $1 of guaranteed income each year increases income by an additional $1.7. We then study the mechanisms behind this effect. We find that instead of reducing ambition and initiative, guaranteed income allows recipients to work differently. Guaranteed income provides protection against downside risk, which increases demand for credit and allows farmers to invest in a more capital-intensive mode of production. We estimate that a $1 guaranteed income each year increases credit demand by $15.7. Survey evidence suggests that guaranteed income increases credit demand by reducing the probability and severity of financial distress. Our results indicate that the uninsured risk inherent in an entrepreneurial venture may be a binding demand-side constraint inhibiting growth. The availability of basic income support increases entrepreneurs' risk-bearing ability and significantly improves their credit demand and production activity.

Keywords: guaranteed income, universal basic income, credit demand, production, capital