The Effect of Microenterprise Lending on Child Schooling in Guatemala

This paper researches how credit access by household enterprises affects the schooling decisions made by these households for their children. It utilizes data from a survey of household enterprises carried out in Western Guatemala in conjunction with FUNDAP - a microenterprise lending program. The study argues that the effect of access to credit on child schooling may be either positive or negative.

The paper derives two major opposite effects of credit access - family labor substitution effect and household enterprise capitalization effect. The research points out that either of these two effects may dominate child schooling decisions in different circumstances.

Further, the study:

• Presents a two-period household model that generates an optimal level of child schooling, accounting for the possibility of asymmetric information in credit and labor markets;
• Carries out comparative statistics to show the condition under which child schooling will increase or decrease when credit constraints are relaxed;
• Provides a brief background of the schooling system in Guatemala.

The paper concludes that:

• Relationship between access to credit and schooling investment is not clearly positive;
• Investment in child schooling also depends on labor market factors;
• Positive effect of credit on child-schooling may be mitigated by the physical capitalization of household enterprises;
• Enterprise capitalization increases the return to child labor and thus the opportunity cost of schooling.