Growing Up Without Finance

Brown, James R.; Cookson, J. Anthony; Heimer, Rawley Z.

doi:10.1016/j.jfineco.2019.05.006

Journal of Financial Economics 134 (3): 591–616

Growing Up Without Finance

James R. Brown, J. Anthony Cookson, and Rawley Z. Heimer

Financial Times list of business school research with social impact. TIAA Paul A. Samuelson Award Finalist.

Abstract. Early-life exposure to local financial institutions increases household financial inclusion and leads to long-term improvements in consumer credit outcomes. We identify the effect of local financial markets using Congressional legislation that led to unintended differences in financial market development across Native American reservations. Individuals from financially underdeveloped reservations enter consumer credit markets later, and upon reaching adulthood, have 10 point lower credit scores and 4 percentage point more delinquent accounts. These effects are long-lived and depreciate slowly after individuals move to more developed areas. Formative exposures to local banking improve consumer credit behavior by increasing financial literacy and financial trust.

Keywords: financial inclusion, financial development, credit scores, financial literacy, trust in banks, Native American reservations, early-life exposure, consumer credit.

JEL codes: G21, K40, P48.

In brief

Growing up near banks and other financial institutions has lasting benefits for people’s financial lives.

Congressional legislation created unintended differences in financial development across Native American reservations, which the paper uses to isolate the effect of local financial markets. People from financially underdeveloped reservations enter credit markets later and, as adults, have credit scores about 10 points lower and 4 percentage points more delinquent accounts; these effects fade only slowly even after they move to more developed areas. Early exposure to local banking appears to work by building financial literacy and trust in financial institutions.

**Table 1.** Study at a glance
Panel A. Design
Question	Does early-life exposure to local financial institutions shape consumer credit outcomes in adulthood?
Setting	Congressional legislation that created unintended differences in financial development across Native American reservations
Data	Individual-level consumer credit records
Method	People from financially underdeveloped versus more developed reservations, including after they move
Panel B. Reported effects for people from underdeveloped reservations
Credit scores as adults		About 10 points lower
Delinquent accounts		4 pp more
Entry into credit markets		Later
Persistence after moving away		Fades slowly

Summarized from the paper. See the paper for exact estimates and specifications.

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Published version, Journal of Financial Economics
Working paper version, SSRN
Accepted manuscript (open access), Iowa State University
DOI: 10.1016/j.jfineco.2019.05.006

Brown, James R., J. Anthony Cookson, and Rawley Z. Heimer. 2019. “Growing Up Without Finance.” Journal of Financial Economics 134 (3): 591–616. https://doi.org/10.1016/j.jfineco.2019.05.006.

@article{heimer2019growing,
  author  = {Brown, James R. and Cookson, J. Anthony and Heimer, Rawley Z.},
  title   = {Growing Up Without Finance},
  journal = {Journal of Financial Economics},
  volume  = {134},
  number  = {3},
  pages   = {591--616},
  year    = {2019},
  doi     = {10.1016/j.jfineco.2019.05.006},
  url     = {https://www.sciencedirect.com/science/article/pii/S0304405X19301205}
}

Topics: Consumer credit and debt; Legal institutions and financial development
Related papers: Shale Shocked: Cash Windfalls and Household Debt Repayment; Politicizing Consumer Credit; Fallible Firms: The Economics of Consumer Redress; Pushing Boundaries: Political Redistricting and Consumer Credit

In brief

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