Poster #87 - Can Financial Inclusion Serve as an Education Policy Instrument? Household-Level Evidence from China

• In Event: Friday Poster Reception

Abstract

Abstract: Despite decades of compulsory schooling legislation, educational poverty—defined as persistent shortfalls below minimum schooling thresholds—remains stubbornly concentrated among asset-poor and rural households in China and across the developing world. Conventional education policy responses focus on supply-side investments: school construction, teacher deployment, and conditional cash transfers. Yet demand-side financial barriers—credit constraints, income volatility, and prohibitive transaction costs—continue to price families out of educational attainment, even when schools are accessible. This study asks whether inclusive finance, by relaxing household financial constraints, constitutes an effective and scalable complement to conventional education policy. Using the China Family Panel Studies (CFPS, 2015–2025), we construct household-level educational poverty measures through the Foster–Greer–Thorbecke (FGT) framework, capturing the incidence, depth, and severity of shortfalls against the nine-year compulsory schooling benchmark. We develop a multidimensional inclusive finance index—spanning accessibility, sustainability, and usage—cross-validated against an established digital financial inclusion index. To address endogeneity, we employ two-way fixed effects models instrumented by pre-expansion variation in local financial infrastructure, with event-study diagnostics confirming identification. Causal mediation analysis isolates three policy-relevant transmission channels: household income augmentation, reduction of education-related transaction costs (fees, transportation, foregone earnings), and consumption smoothing against income shocks that would otherwise force school dropout. Heterogeneity analyses center on the households and contexts most relevant to education policymakers: asset-poor families, rural and left-behind households, and communities facing constrained school supply. We expect that inclusive finance meaningfully reduces educational poverty, but that its effectiveness is contingent on adequate local education infrastructure—a finding with direct implications for the sequencing and coordination of financial and educational investments. This research contributes to the education policy literature by: (i) introducing a rigorous, replicable FGT-based methodology for measuring household educational poverty in survey and administrative data; (ii) establishing causal micro-evidence that financial inclusion reduces dropout risk and schooling gaps, particularly among the most educationally marginalized; and (iii) identifying policy complementarities between digital financial infrastructure and school provision that can inform integrated anti-poverty strategies in China and comparable developing economies.

Authors

• XINYU LU, Zhejiang University
  Presenting Author

• Yanyi Wu, Zhejiang University
  Non-Presenting Co-Author

• CHENGHUA LIN, ZHEJIANG UNIVERSITY
  Non-Presenting Co-Author