Credit Constraints and Temporary School Withdrawal - Evidence from Malawi -

Abstract

Using data from the 2013 Malawi Living Standards Measurement Study (LSMS), this study examines the relationship between household credit constraints and schooling decisions regarding temporary withdrawals from school. By directly identifying credit-constrained households based on access to formal and informal financial institutions, the analysis finds evidence of non-separability between household consumption and schooling decisions in credit-constrained households. To explore the underlying mechanisms, the study first analyzes how determinants of temporary withdrawal differ by credit constraint status. It then estimates the causal impact of credit constraints on withdrawal decisions. The results suggest that credit-constrained households are significantly more likely to experience temporary school withdrawals. The findings are robust across various model specifications that account for the potential endogeneity of credit constraints, including a recursive simultaneous bivariate probit model, a linear instrumental variable regression model, and an endogenous treatment-effects model. This study provides empirical support for the hypothesis that financial constraints hinder educational investment and offers implications for policy interventions aimed at improving credit access.