Labelled loans and human capital investments

Liquidity constraints are known to significantly impede human capital investment decisions in developing countries. However, it is not obvious whether, and the extent to which, labelled microcredit - linked with the investment by name only - will boost human capital investments, particularly since money is fungible and a label is not a strong commitment. Drawing on a cluster randomised controlled trial of a sanitation microloan intervention in rural India, we show that labelled microcredit is effective in increasing sanitation investments. However, not all loans are used for sanitation investments. Testing predictions from a theoretical model that integrates loan labels provides novel evidence that loan labels influence household borrowing and investment decisions. Labelling of loans - which to date has not received much attention in the literature - is a viable strategy to improve uptake of lumpy preventive health investments.