Abstract:

This dissertation examines how changes in access to financial services and education in India have affected consumption and human fertility.

The first chapter examines how the distributions of wealth and consumption change over time when a community of buffer-stock consumers gains access to credit and to an increase in the return on savings that is sufficient to overcome their impatience. Although loosening liquidity constraints produces an immediate increase in consumption for every household, the distribution of consumption eventually falls to a new stationary distribution with a lower cross-sectional mean. An increase in the return on savings can cause consumption to grow and also increase inequality if there is heterogeneity in the rate of time preference or if some communities or portions of communities have access while others do not. The theoretical results show that evaluating the effects of changes in financial access on consumption, poverty, and inequality is difficult, since the long-term effects can be very different from the short-term effects. I use simulations to illustrate the difficulties, showing that with reasonable parameters it is possible to estimate large statistically significant effects of opposite sign by shifting the period of observation. A panel of regions in India combining newly created measures of consumption with data on bank branch expansion gives support for the consumption path the theory describes. Mean consumption in areas that gained bank branches increased substantially at first, but then fell.

The second chapter considers whether changes in financial access are related to changes in human fertility. If parents view children as a form of investment or insurance for old age, parents as investors should adjust the share of children in their portfolios in response to a change in the investment environment as a simple model illustrates. Examining the changes between the 1981, 1991, and 2001 censuses using spatial error modeling reveals that there is little evidence of adjustments in fertility in response to an increase in the number of bank branches per capita at the district level. Further, matching 515,000 villages between the 1991 and 2001 censuses shows that changes in access to the post office savings system are not related to the ratio of children to women. Increased access to financial markets is likely to have little independent effect on fertility.

There has been a tremendous increase in education levels in India in the last 60 years, and the final chapter examines how the increase has affected material wellbeing. Within each age cohort there is a positive slope of education and consumption: an extra year of school increases consumption between 5 and 8% for both men and women. Yet in aggregate male cohorts with an extra year of education consume only 3-4% more, which appears to have decreased after 1991, while female cohorts with more years of education do not live in households with higher consumption. This result is robust to: (1) using econometric models that account for survey measurement error, (2) different measures of household consumption and composition, (3) allowing returns to differ by state, and (4) age mismeasurement. I propose several reasons why the aggregate returns are lower.