Safet Nets, Credit, and Investment: Evidence from a Guaranteed Income Program

Nishant Vats, Finance PhD student

Do safety nets affect investment? If so, how? Combining a natural experiment that gave guaranteed income to landowning farmers in India with transaction-level bank account data and loan-level credit bureau data, we evaluate the impact of unconditional and prepetual guaranteed income on small farmer entrepreneuers. We find that $1 guaranteed income each year generates an additional $1.7 of income from farming.  We then study the mechanisms behind this effect. We find that instead of reducing ambintion and initiative, guaranteed income allows recipients to work differently. Specifically, guaranteed income provides protection against downside risk, which increases demand for credit and allows farmers to invest in a more capital-intensive mode of production. Survey evidence suggests guaranteed income increases credit demand by increasing the probability of loan repayment and reducing the cost of default. Our results suggest that uninsured risk inherent in an entrepreneurial venture may be a binding demand-side constraint inhibiting growth. The availability of basic income support increases entrepreneurs' risk-bearing ability and significantly improves their production activity.