Abstracts Economics

CREDIT CONSTRAINTS AND LABOR SUPPLY

by Kien Bui Dao

This paper examines labor supply adjustment – both at the intensive (hours worked) and extensive (labor force participation) margins – following financial market development. Theoretically, well-functioning credit markets allow individuals to transfer resources and substitute leisure across states. Hence, individuals would behave (w.r.t. labor supply) differently under complete and incomplete credit markets. We exploit the staggered passage of bank branching deregulation in the U.S. to study the impact of relaxing credit constraints on labor supply decisions. The intensity of labor supply, on average, is about 0.3 hours lower after the reform (and about 0.5 hours lower after five years following deregulation). We also find deregulation's impact heterogeneity across income distribution and demographics. The effect of lifting branching prohibitions is most pronounced for the lower-middle income (marginal) group. Further, these findings indicate that blacks were facing higher effective loan prices than whites, suggesting the existence of both statistical and taste-based discriminations. In contrast, we find little to no evidence that deregulation has a significant impact on the extensive margin of participation. Advisors/Committee Members: Ume, Ejindu (Advisor).