Safety Nets, Credit Access, and Income Smoothing

• Applicant: Winta Beyene, Ph.D.
• Subject Area: Accounting and Finance ; Economic Policy, Applied Economics
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 568938073

Households experience income shocks throughout their lives, such as job loss, health crises, or divorce. Protecting against the financial consequences of such risks provides significant welfare benefits. While government safety nets offer support, households often rely on credit to smooth income shocks, making debt a primary coping tool. However, research on credit markets' effectiveness as safety nets, particularly in the absence of government programs, remains limited. The SNCAIS project examines how exclusion from social safety nets affects income smoothing and local entrepreneurship, and whether credit access offsets these impacts. I exploit a natural experiment from the 1996 federal policy change that imposed a five-year ban on legal immigrants' access to social safety nets. Using both the introduction of this ban and state-level variations in its adoption, I examine its impact on income smoothing through local entrepreneurship. In a second step, I leverage differences in credit availability to assess whether access to credit mitigates these effects. Unlike government safety nets that redistribute resources across populations, credit markets reallocate resources over time within households, making their effectiveness dependent on borrowing constraints. Understanding these limitations is crucial for policy design, as the project's findings can inform adjustments to social safety nets and evaluate whether expanding credit access can effectively support vulnerable households.

• DFG Programme: Research Grants