Risk, Financial Markets, and Human Capital in a Developing Country

Abstract

This paper explores the link between financial market incompleteness and human capital accumulation. We examine how child school attendance responds to seasonal fluctuations in the income of agrarian households using panel data from rural India. To pinpoint market imperfections, we study responses to aggregate and idiosyncratic, as well as to anticipated and unanticipated, income shocks. Our main finding is that seasonal fluctuations in school attendance are a form of self-insurance, but one which does not result in a substantial loss of human capital on average.