Growing Up Without Finance

Abstract: This paper provides novel evidence on the consequences of legal contracting institutions and local financial development for household financial health. Using micro-level panel data on consumer credit, we show that growing up in areas with stronger contracting institutions and more robust financial markets significantly improves household financial well-being over the long run. To identify the effect of local financial development, we exploit externally imposed differences in court enforcement of debt contracts that led to significant, long-term differences in local financial institutions across Native American reservations in the United States. Young borrowers who grow up in a reservation region with stronger contract enforcement encounter better local credit markets, more quickly develop a credit history, and have persistently better household financial health thereafter. We also find that growing up without finance has persistent negative effects on financial health: Although credit scores improve significantly after individuals move away from reservation areas with weak credit markets, it takes at least a decade before their credit scores fully converge with similar borrowers who grew up in areas with better local financial markets.