Credit Constraints and Human Capital Policies

Abstract

We develop a model of voting behavior to show how credit constraints affect a society's demand for government spending on human capital policies, namely, public policies that increase the returns to human capital investments. The main result of the model is that a reduction in credit market frictions can increase the share of government spending on such policies, with a greater increase in poorer societies. We motivate our analysis by providing suggestive cross-country evidence that the composition of government spending is related to credit constraints and provide additional cross-country evidence in support of other predictions of the model.