Intergenerational Mobility and Credit

J. Carter Braxton, Nisha Chikhale, Kyle F. Herkenhoff and Gordon Phillips

No 32031, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How did rising credit limits and falling bankruptcy costs from the 1970s to 2000s – the so-called “democratization” of credit — affect intergenerational mobility? We answer this question in two steps. First, we link parents’ credit reports to their children’s subsequent labor market outcomes. Using instrumental variable (IV) regressions, we find that greater parental credit access is associated with greater earnings of children, more childcare investment, improved educational and labor outcomes for children, and better smoothing around large income losses. Second, we use our IV estimates to discipline a dynastic model of parental investment with defaultable debt. The democratization of credit produces two offsetting forces: (1) expanded credit limits promote child investments, but (2) more lenient bankruptcy policy leads low-income households to reduce their savings and invest less in their children’s human capital. Quantitatively, the second force dominates and so democratizing credit lowers intergenerational mobility. Unlike the IV analysis that implicitly holds wealth fixed, the democratization of credit generates sharp reductions in wealth among the lowest earning households in our model. The model also sheds light on the nature of selection in our IV estimates, which we use to produce unbiased estimates of intergenerational credit elasticities.

JEL-codes: D14 E21 J13 J24 (search for similar items in EconPapers)
Date: 2024-01
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-his, nep-lab and nep-mac
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