Liquidity Constraint and Child Labor In India: Is Market Really Incapable Of Eradicating It From Wage-Labor Households?

Basab Dasgupta ()

No 2005-37, Working papers from University of Connecticut, Department of Economics

Abstract: One way to measure the lower steady state equilibrium outcome in human capital development is the incidence of child labor in most of the developing countries. With the help of Indian household level data in an overlapping generation framework, we show that production loans under credit rationing are not optimally extended towards firms because of issues with adverse selection. More stringent rationing in the credit market creates a distortion in the labor market by increasing adult wage rate and the demand for child labor. Lower availability of funds under stringent rationing coupled with increased demand for loans induces the high risk firms to replace adult labor by child labor. A switch of regime from credit rationing to revelation regime can clear such imperfections in the labor market. The equilibrium higher wage rate elevates the household consumption to a significantly higher level than the subsistence under credit rationing and therefore higher level of human capital development is assured leading to no supply of child labor.

Keywords: Credit Rationing; Informal Credit; Child Labor; Self Revelation Mechanism (search for similar items in EconPapers)
JEL-codes: E26 O16 O17 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2005-08
New Economics Papers: this item is included in nep-agr, nep-cwa, nep-dev, nep-dge and nep-ent
Note: I am really grateful to my advisors, Christian Zimmermann and Steven Ross for their guidance and valuable comments and to Prof. Samar K. Datta, IIMA, India for his help. Usual disclaimer applies.
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Citations: View citations in EconPapers (1)

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