Access to vehicle financing in Brazil improved mobility and generated large returns (12-15% per year) through improved labour market outcomes
Various interventions have been proposed to overcome the hurdles to economic development faced by low-income households. Much hope has been placed in the transformative power of financial access, as the returns to capital should be the largest for the most capital-constrained individuals. Yet experimental evidence from a diverse range of settings has documented either modest or no effects of extending credit to low-income households (Banerjee et al. 2015, Crepon et al. 2015, Angelucci et al. 2015, Attanasio et al. 2015, Augsburg et al. 2015). These findings raise the question of whether the return on capital is generally lower than expected for credit-constrained households, or whether interventions require better targeting of populations and investments that generate higher returns.
Credit access to purchase durable goods in Brazil
To contribute to this debate, we use data on participants in a group-lending mechanism – Consorcios – in Brazil (van Doornik et al. 2024), which generates random time-series variation in access to credit tied to the purchase of a motorcycle. Consorcios are a widespread group-lending mechanism for financing durable goods in Brazil, with more than 6.7 million participants in a given year. We focus on motorcycle groups, which tend to comprise of credit-constrained individuals seeking to invest in individual mobility.
Every month, participants in a consorcio make identical contributions, which are then allocated to a subset of participants as credit designated for motorcycle purchase. Recipients of credit are determined through lotteries and auctions. When allocating credit through lotteries, consorcios use a contractually specified algorithm to translate the outcome of the national lottery (Loteria Federal) into ticket numbers that have been assigned to all participants beforehand.
Since we know the algorithm a group employs to translate the national lottery number into the winning ticket number, we use these simulated lottery winners as an instrument to predict actual lottery winners.
Credit access improves labour market outcomes
To obtain estimates for the labour market effects of an individual winning a credit lottery, we estimate a two-stage least square specification.
Our results suggest that with access to credit, formal employment increases by 2.37 to 3.07 percentage points (5.8 to 7.5%) in the first year after individuals obtain credit, which increases to 6.64 to 8.62 percentage points (16.0 to 20.8%) after five years. For salaries, we observe a relative increase of 3.12 to 4.05% in the first year after obtaining credit, which increases to 8.00 to 10.39% after five years. For commuting distance, we observe a relative increase of 3.22 to 4.18% in the first year after obtaining credit, which increases to 15.25 to 19.81% after five years. For transportation distance, we observe a relative increase of 1.81 to 2.35% in the first year of obtaining credit, which increases to 5.88 to 7.64% after five years.
The role of public transportation and individual-specific characteristics in the impact of credit access
In the cross-section, we observe that treatment effects vary with individual- and location-specific characteristics. Individuals living in areas with less developed public transportation and fewer local employment opportunities, and younger individuals with lower salaries, experience greater increases in employment, salaries, and commuting distance. These findings suggest that investment in individual mobility can be a substitute for public transportation and that returns to credit for investment in individual mobility are higher for young, low-income individuals who live in areas with sparse local labour markets.
The return to credit for investment in individual mobility
Our estimates suggest that access to credit for investment in individual mobility generates a real annual return of 11.71 to 15.31% over 20 years. Our estimates are likely to be an underestimate of the return of access to credit for investment in individual mobility since we only focus on changes in salaries. Access to credit for investment in individual mobility may provide additional benefits, for example, reducing commuting time or improving access to education (Muralidharan and Prakash 2017). In addition, since our salary estimates relate to intensive margin effects in the formal sector, we may miss increases in salaries for individuals who switch jobs in the informal sector or move from an informal to a formal job.
Implications for policy seeking to increase access to credit
Our findings suggest that extending credit for investment in mobility can generate large returns. It is often assumed that access to labour markets does not require a large upfront investment (e.g. Banerjee and Newman 1993). Our results suggest that overcoming spatial constraints in labour market access may require a large upfront investment and, therefore, access to capital. Our results also resonate with theories of spatial mismatch (Kain 1968) and suggest that policies that increase individuals' mobility (Fan 2012) may have important implications for labour market access.
Recent evidence by Beaman et al. (2023) suggests that return on capital is higher if it targets individuals who self-select into credit markets. This suggests that mechanisms that can target this population generate higher returns on capital. This poses a practical challenge for policymakers and may be an important aspect to consider in designing mechanisms and policies to allocate grants. A potential upside of market-based solutions is that to be sustainable, they endogenously require targeting populations that generate high returns, as in the case of consorcios in Brazil. Identifying populations that generate high returns on capital and designing policies and mechanisms to target them is a promising avenue for future research. For example, Hussam et al. (2022) show that eliciting community information can help identify high-ability entrepreneurs who generate high returns on investment.
Our findings have broader policy implications. For example, our results have implications for urban and infrastructure planning to mitigate spatial mismatch between workers and firms. Our results also suggest that providing access to mobility for job seekers significantly improves their labour market prospects; for example, in the context of welfare-to-work programs. Similarly, in addition to facilitating access to credit for investment in individual mobility, it may be beneficial to allow financially distressed individuals to maintain access to individual mobility; for example, through asset exemption rules in bankruptcy proceedings.
References
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