The Effect of Microenterprise Lending on Child Schooling in Guatemala

Many recent theoretical models which portray human capital investment as a primary engine of economic growth underemphasize the structure of the microeconomic decision-making process which gives rise to human capital investment. In both developed and developing countries human capital investment tends to be a household-level decision made in the form of child schooling. For families in developing countries which operate household enterprises the decision involves an economic trade-off between future returns to schooling and the current return to childrens labor in the enterprise. The author explores how access to credit in developing countries can affect the child schooling decision. A 2-period household model is presented which endogenously generates an optimal level of child schooling by households accounting for the possibility of asymmetric information in credit and labor markets. Comparative statics are then conducted to show the conditions under which child schooling will increase or decrease when credit constraints are relaxed. A brief background of the schooling system in Guatemala and a brief description of the survey data collected in Guatemala are provided followed by the presentation of empirical tests and a summary of empirical findings with suggestions made for further research.