Microcredit and Children’s Cognitive Outcomes: Evidence from Indonesia

This paper studies the effect of microcredit on children’s cognitive outcomes using panel data from Indonesia. The research paper attempts to provide novel evidence on the effect of microcredit on non-monetary outcomes such as human capital formation in children. To this end, the paper investigates the association between microcredit participation and the children’s cognitive test score in two periods of time. The data comes from the Indonesian Family Life Survey (IFLS), allowing for a panel analysis and a rich set of co-variate. The first two results from the analysis of descriptive statistics and household wealth indicators suggest that borrowers are wealthier and the microcedit participation notably generates income. However, there is no significant effect on child education. Further, there is suggestive evidence that microcredit is negatively associated with cognitive scores, yet the effect is insignificant and not robust. The paper then examines possible channels through which microcredit may impact child outcomes. It is found that microcredit does not increase the likelihood that mothers work nor the age of children. In sum, there is little evidence that microcredit impacts cognitive outcomes – for better and for worse. Further work is needed to examine the robustness of this finding and other channels and related heterogeneities.