The Nature of Credit Constraints and Human Capital

55 Pages Posted: 4 Apr 2008 Last revised: 8 Jul 2022

See all articles by Lance Lochner

Lance Lochner

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER)

Alexander Monge-Naranjo

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: April 2008

Abstract

This paper studies the nature and impact of credit constraints in the market for human capital. We derive endogenous constraints from the design of government student loan programs and from the limited repayment incentives in private lending markets. These constraints imply cross-sectional patterns for schooling, ability, and family income that are consistent with U.S. data. This contrasts with the standard exogenous constraint model, which predicts a counterfactual negative ability -- schooling relationship for low-income youth. We show that the rising empirical importance of familial wealth and income in determining college attendance (Belley and Lochner 2007) is consistent with increasingly binding credit constraints in the face of rising tuition costs and returns to schooling. Our framework also explains the recent increase in private credit for college as a market response to the rising returns to school.

Suggested Citation

Lochner, Lance and Monge-Naranjo, Alexander, The Nature of Credit Constraints and Human Capital (April 2008). NBER Working Paper No. w13912, Available at SSRN: https://ssrn.com/abstract=1116588

Lance Lochner (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

National Bureau of Economic Research (NBER)

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United States

Alexander Monge-Naranjo

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

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Saint Louis, MO 63011
United States