Human capital, fertility and growth under borrowing constraints

In this paper we investigate economic growth in economies where households face liquidity constraints, and young agents rely on the family to finance their investments in education. We analyze the type of family aid in which youths can borrow because their parents guarantee the loan repayment with their income. In an OLG model of economic growth, it is shown how multiple equilibria can arise. A stable trap of low-development is characterized by high fertility rates and low investment in human capital. On the other hand, economies with a sufficiently low starting rate of fertility grow according to a process that may describe a demographic transition. In this case, borrowing constraints gradually vanish and the process of growth reaches a steady state characterized by the optimality of fertility and schooling choices. Econometric evidence on the significant roles of family income and size, and credit constraints among the determinants of international secondary school enrollment rates is provided to support the main hypotheses of the model.