DP11889 | consumption and investment in resource pooling family networks

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This paper examines a novel motive for resource pooling in family networks in rural economies: to relax credit constraints and facilitate investment in non-collateralizeable assets for which credit market imperfections are most binding. We thus complement established literature examining risk-sharing motives for resource transfers within family networks, as well as motives based on kinship tax obligations. We do so exploiting the Progresa program data, in which family networks can be identified, households are subject to large exogenous resource inflows, and detailed responses on consumption and an array of investments can be tracked in a household panel over five years. We find that for every dollar that accrues to the family network through Progresa transfers, food consumption expenditures increase by around 65c for both households eligible for Progresa and ineligible members of the same family network. Hence the marginal propensity of families to invest/save out of every dollar is around .35, and we document how this is channeled towards easing credit constraints poorer network members face in financing non-collateralizable investments into their children’s human capital. We show these consumption and investment benefits of being embedded within a family network are sustained …ve years after households first experience resource transfers from Progresa. Hence the interplay between resource inflows and resource pooling by family networks can place network members on sustained paths out of poverty.