Economic Quarterly

2008

 

Winter 2008

Credit Access, Labor Supply, and Consumer Welfare

Kartik B. Athreya

Recent evidence suggests that households' access to credit has improved. If households can vary labor supply in response to stochastic productivity shocks, changes in credit markets can be expected to alter not only savings and borrowing behavior, but also labor effort. The purpose of this article is to take a step toward understanding how changes in the ability of households to borrow alter the behavior of consumption, saving, and leisure. The main results are as follows. First, the hardest working households are those who are least wealthy, and most strikingly, also the least productive. Second, credit access can play an important role in reducing high labor effort by low-productivity households. Third, the buffer-stock tendencies of households imply that the distance from the borrowing constraint is often more important that the actual level of wealth in influencing labor effort. Fourth, measures of the welfare gains to current consumers show that there are significant benefits from expansions in credit access, and that these gains accrue disproportionately to the relatively poor and relatively rich.

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