Journal of Development Economics
- Take-up of lumpy human capital investments can be increased by labeled microcredit.
- Sensitivity to loan labels plays an important role in household investment choices.
- Not all labeled loans convert into investments intended by the loan label.
- New labeled loans can lead to substitution away from other labeled loans
- A theoretical model and experiment in India demonstrate loan label sensitivity.
Imperfect capital markets and commitment problems impede lumpy human capital investments. Labeled loans have been postulated as a potential solution to both constraints, but little is known about the role of the label in influencing investment choices in practice. We draw on a cluster randomized controlled trial in rural India to test predictions from a theoretical model, providing novel evidence that labeled microcredit is effective in influencing household borrowing and investment decisions and increasing take-up of a lumpy human capital investment, a toilet.