(Job Market Paper)
Credit constraints restrict the ability of households to borrow from the credit market for investment purposes, which establish a barrier to the development of small-scale businesses and limit employment creation at the firm level. This study empirically examines the impact of credit constraint on households’ choice to become self-employed using data from the 2019 wave of the Survey of Consumer Finance (SCF) for the United States economy. This study also incorporates the role of initial wealth and risk attitude in influencing the households’ decision to become self-employed. The results based on the Instrumental Variable (IV) Probit model suggest that credit constraint reduces self-employment opportunities as well as startup business activities in the United States economy. The findings are robust to alternate specification of models and various proxies of key variables, i.e, rejected borrowers and discouraged borrowers. Further analysis shows that high risk attitude households significantly prefer to be self-employed.
Credit constraints restrict households from financing their investments with their future labor income. This problem also adversely impacts the amount saved during working life, which further limits saving for retirement. Hence, households have no option to maintain a decent
standard of living during retirement, except through investing in Defined Contributions (DCs) plans and Individual Retirement Accounts (IRAs). But these retirement investments require financial knowledge and complex decision making in the presence of credit constraint. From this perspective, this study uses the data of more than 11,000 US households from the 2020 wave of the Survey of Household Economics and Decision making (SHED) and analyzes retirement planning decisions in the presence of credit constraint along with financial literacy. The findings based on the Instrumental Variable (IV)-Probit approach suggest that credit constraint significantly reduces retirement planning contributions across the various models. The results also indicate that individuals who are under 35 years old, female, and married observe more credit constraint, while it is low among individuals with less than a high school education, Asians, high income groups, and self-employed households. In addition, less financial literacy and more credit constraint significantly contribute to insufficient retirement planning .
Liquidity constraint and fluctuations in business cycle are widely analyzed because that explore
the firms’ ability to use durable assets both as factor of production as well as collateral for loan.
Therefore, firms observe the credit limit and borrow only the fraction of the value of their assets. From this perspective, this study analyzes the financial friction and impact of uncertainty shocks on business cycle fluctuations. It also includes the Rotemberg-type price rigidity along with fiscal and monetary interventions to evaluate the macroeconomic fluctuations. This study concludes that various uncertainty shocks, including productivity, investment, preference, interest rate and government spending impact the aggregate economic activities and asset prices. In additional, it also gives the way to understand expansionary impact of uncertainty shocks at economy level.
In agriculture sector, financing the climate change adaptations have emerged as central issue
that depend on the availability of credit financing from formal, semi-formal and informal lenders. But there has been limited access to the credit for adaptation because of the inefficient and inequitable credit market, induced by the variation among farmers about socio-economic status, unavailability of collateral as security for loan and high transaction as well as application cost. From this perspective, this study analyzes the inefficiency and inequity measures of credit
market imperfection by utilizing the field data from various Agro-ecological zones of Pakistan.
The findings based on Two Stage Least Square-Instrumental Variable (2SLS-IV) model suggest
that marginal and small farmers have less access to credit that reduce the farmer’s extent
to climate change adaptations. Availability of non-farm income improves the access to credit
and adaptation investment while leased-in land holding farmers have less access to credit from
formal and informal lenders. Increase in collateral significantly improve the farmer’s access to
credit. On policy grounds, awareness about Micro Finance Institutions (MFIs) among backward
farmers is still scarce and there has been immense need for dissemination about the existence of MFIs for loan provision at scattered and climate change vulnerable areas. In addition, market
imperfection should be minimized through the direct provision of agriculture inputs at local
market without the role of informal lenders.