How does credit access affect children's time allocation? Evidence from rural India

Abstract

Using a unique dataset obtained from rural Andhra Pradesh, India that contains direct observations of household access to credit and detailed time use, results of this study indicate that credit market failures lead to a substantial reallocation of time used by children for activities such as schooling, household chores, remunerative work, and leisure. The negative effects of credit constraints on schooling amount to a 60% decrease of average schooling time. However, the magnitude of decrease due to credit constraints is about half that of the increase in both domestic and remunerative child labor, the other half appearing to come from a reduction in leisure.

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INSTITUTE OF DEVELOPING ECONOMIES

IDE Discussion Papers are preliminary materials circulated
to stimulate discussions and critical comments














Keywords: child labor, schooling, gender bias, credit constraint, household models
JEL classification: I21, I22, J22, O12, O16

Abstract

Using a unique dataset obtained from rural Andhra Pradesh, India that contains direct
observations of household access to credit and detailed time use, results of this study indicate that
credit market failures lead to a substantial reallocation of time used by children for activities such
as schooling, household chores, remunerative work, and leisure. The negative effects of credit
constraints on schooling amount to a 60% decrease of average schooling time. However, the
magnitude of decrease due to credit constraints is about half that of the increase in both domestic
and remunerative child labor, the other half appearing to come from a reduction in leisure.
IDE DISCUSSION PAPER No. 183

How Does Credit Access Affect Children’s
Time Allocation? Evidence from Rural India

Nobuhiko Fuwa✱ Seiro Ito♦ Kensuke Kubo✣
Takashi Kurosaki♠
Yasuyuki Sawada♣

January 2009
IDE DISCUSSION PAPER No. 183
✱ Department of Food and Resource Economics, Chiba University. E-mail: nfuwa@faculty.chiba-u.jp.
♦ Development Studies Center, Institute of Developing Economies. E-mail: itohse@ide.go.jp.
✣ Development Studies Center, Institute of Developing Economies. E-mail: kuboken@ide.go.jp.
♠ The Institute of Economic Research, Hitotsubashi University. E-mail: kurosaki@ier.hit-u.ac.jp.
♣ Faculty of Economics, University of Tokyo. E-mail: sawada@e.u-tokyo.ac.jp.

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How Does Credit Access Affect Children’s Time Allocation?∗ ∗
Evidence from Rural India

January 25, 2009

Nobuhiko Fuwa♦, Seiro Ito♣, Kensuke Kubo♥, Takashi Kurosaki∗, and Yasuyuki Sawada♠

Abstract

Using a unique dataset obtained from rural Andhra Pradesh, India that contains direct
observations of household access to credit and detailed time use, results of this study
indicate that credit market failures lead to a substantial reallocation of time used by
children for activities such as schooling, household chores, remunerative work, and
leisure. The negative effects of credit constraints on schooling amount to a 60%
decrease of average schooling time. However, the magnitude of decrease due to credit
constraints is about half that of the increase in both domestic and remunerative child
labor, the other half appearing to come from a reduction in leisure.

Keywords: child labor, schooling, gender bias, credit constraint, household models.

JEL classification: I21, I22, J22, O12, O16

∗ The authors would like to acknowledge the invaluable assistance in data collection by MV Foundation and
the financial assistance by Toyota Foundation (Grant No. D06-R-0360). They would also like to thank J.
Bhaskar, S. Mahendra Dev, Marcel Fafchamps, Leonardo A. Lanzona, Jeff Nugent, Venkat Reddy, Shantha
Sinha, Tomomi Tanaka, Takashi Yamano and the participants at NEUDC 2006 at Cornell University, the
Conference in Honor of P. Yotopoulous and J. Nugent at the University of Tokyo, Madras Institute of
Development Studies, Philippine Economic Society Annual Meeting 2006, the 2007 Theoretical Economics
and Agriculture (TEA) Meeting of the Agricultural Economics Society of Japan, and the University of
Queensland for their valuable comments and discussions.

♦ Department of Food and Resource Economics, Chiba University. E-mail: nfuwa@faculty.chiba-u.jp
♣ Development Studies Center, Institute of Developing Economies. E-mail: itohse@ide.go.jp.
♥ Development Studies Center, Institute of Developing Economies. E-mail: kuboken@ide.go.jp.
∗ The Institute of Economic Research, Hitotsubashi University. E-mail: kurosaki@ier.hit-u.ac.jp.
♠ Faculty of Economics, University of Tokyo. E-mail: sawada@e.u-tokyo.ac.jp.

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1. Introduction

Among the many market failures that stand in the way of economic development, the
most pervasive may be those credit market failures which “impede the ability of the poor to make
the private or collective ‘investments’ they need to escape poverty” (Banerjee, Benabou and
Mookherjee 2006, xv). Given this, there has been a surge of interest in recent years in investigating
the effects of credit market failures on education for children, the most important investment the
poor can make.
Most empirical studies in developing countries conclude that household access to credit
markets has a significant effect on childhood education and on child labor. However, there appear
to be two common limitations shared by most existing studies: First, datasets used in these studies
do not have direct observations of access to credit markets by sample households. As a result,
researchers have relied on various kinds of exogenous income shocks in order to infer effects of
credit access (or relaxation of credit constraints) indirectly. Second, since data on comprehensive
time use patterns of children are rarely available, many studies focus on either education (e.g.
Jacoby 1994, Jacoby and Skoufias 1997; Sawada and Lokshin, 2009) or child labor (e.g. Beegle et
al 2006). However, the effects of credit market failure on the reallocation of children’s time are
likely to be seen in all activities including household chores and leisure as well as schooling and
remunerative work. While it has often been assumed that an increase (decrease) in hours spent in
child labor corresponds to a comparable decrease (increase) in schooling hours, recent studies have
found that such a correspondence is far from one-to-one (Ravallion and Wodon 2000, Edmonds
2006). These studies indicate that a major source of this imperfect substitution is likely to come
from a reduction in leisure. However, the amount of time spent on leisure is not directly observed
in these studies. As a result, existing research on the effects of credit access on schooling and/or
child labor do not shed light on how credit access affects the burden of household production
(relative to market work) on children’s time or leisure.
To address this void, the present study utilizes a unique household survey dataset

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collected in a rural part of the Indian state of Andhra Pradesh where the incidence of child labor is
found to be relatively high. This dataset contains two special modules that are typically not
available in large-scale multi-purpose household surveys: (1) time use and (2) credit access. The
detailed time-use module records time allocation of all household members for various activities
and allows critical distinctions to be made between aspects such as time spent on schooling,
remunerative work, household chores, and leisure. In addition, the credit module contains detailed
information on access to credit. This in turn allows distinctions to be made between
credit-constrained and unconstrained households and also facilitates modeling the determination of
credit market access explicitly.
Previewing findings of the present study, results suggest that credit constraints lead to
substantial reallocation of time use among children. Children in credit-constrained households tend
to increase time allocated for both remunerative and domestic work. This in turn comes at the
expense of time spent for schooling and leisure. This study shows that analyses of children’s time
allocation focusing exclusively on remunerative work and schooling, ignoring domestic work or
leisure, can underestimate the ill effects of credit constraints.
The remainder of this paper is organized as follows: Section 2 includes a review of the
existing literature related to credit constraints and education. The major features of the dataset used
in this study are described in Section 3. Section 4 includes empirical specifications, and empirical
results are provided in Section 5. Conclusions are discussed in Section 6.

2. Identifying the Effects of Credit Access on Household Behavior: A Survey

In the absence of data with direct observations of credit-constrained and unconstrained
households, a conventional approach to incorporating credit constraints in empirical models is to
split the sample into those who are likely to be credit-constrained and those who are not (Zeldes
1989; Morduch 1990). This exogenous approach, however, has two potential problems: First, it is
unlikely that a single variable such as the income-wealth ratio or land ownership is a sufficient
predictor of consumer abilities to borrow (Garcia et al 1997, p.158; Jappelli 1990). Second, credit