The Impact of Consumer Credit Access on Earnings Mobility, Entrepreneurship and Income Inequality

This research project will study the effects consumer credit access on many family outcomes, including employment, student debt, income, and new business formation. The research is part of a larger project that investigates the effects of consumer credit access on several outcomes, including economic growth, consumption and investment, income distribution, intergenerational transmission of wealth and income, and innovation. The study will be based on an innovative data linkage method that combines personal credit data and Census longitudinal data over longer periods of time. The researchers will also use an innovative approach to study the mechanisms through which credit access affect several outcomes at the family level as well as the macro level. This research project deals with a very important subject as credit access has become a very important issue for poverty eradication in the US and the around the world. The results of this research will provide inputs into policies to reduce poverty, close the education gap, increase employment and productivity and economic growth generally. This study will therefore have important effect on economic growth in the US.

This proposed research will use a mix of reduced form and structural estimation strategies to identify the causal impact of family credit access on several outcomes. The first hypothesis is that parental credit access improves child college attendance rates and decreases the amount of debt incurred by the child. The identification strategy is based on several events that generate exogenous variation in credit access. This exogenous variation in credit access is then used to look at subsequent student debt, labor market outcomes, and entrepreneurial outcomes of the children (and parents). The project will also use variation across states income cutoffs for bankruptcies, introduced by the 2005 bankruptcy-reform act as one of the instruments for credit access. Parents just above the cutoff (who cannot discharge debts) should have greater credit access, whereas parents just below the cutoff (who can file for bankruptcy) should have lesser credit access. The research will also estimate a structural model to obtain micro-elasticity estimates from the reduced form estimates and then conduct counterfactuals to measure the impact of broad economy-wide credit access on individual outcomes. The results of this research project will provide valuable inputs into policies to reduce poverty and the inter-generational transmission of poverty in the US and globally. This will help establish the US as the global leader in poverty reduction.