The Long-term Impact of Credit Constraints on Assets, Intergenerational Transfers, and Consumption: Evidence from the Rural Philippines

gave me a better understanding of the processes analyzed in this paper. Scott McNiven provided excellent research assistance, and Celine Castillo-Macy helped finalize the document. All errors and omissions are mine. ABSTRACT Using a longitudinal data set from Bukidnon, Philippines, this paper explores the impact of past credit constraints on asset holdings, intergenerational transfers, and consumption expenditures of original survey respondents and a sample of their offspring, both those who have remained in the same area and those who have moved to a different location. The study design controls for two potential sources of bias in the estimates: (1) bias due to endogeneity of credit constraint status; and (2) selection bias owing to the exclusion of migrants. The paper examines the impact of credit constraints using alternative estimation methods, namely instrumental variables, treatment-effects regressions, and switching regressions. The results show that credit constraints have significant negative long-term impacts on parents and children alike; these results are robust to the choice of estimation method. Compared to unconstrained households, parent households that were credit constrained in 1984/85 have significantly lower holdings of land and nonland assets in 2003, and made significantly lower transfers of nonland assets to children. Parent households that were credit constrained in the past also have lower current weekly expenditure per adult equivalent. Children whose parents were credit constrained in the past have lower values of land and assets, and lower weekly expenditure per adult equivalent, compared to children whose parents did not face such constraints. This suggests that interventions to eliminate credit market imperfections may not only have impact on current incomes and productivity, but also on wealth and well-being in the long-term. 2