Growing Up without Finance
James R. Brown, J. Anthony Cookson, and Rawley Z. Heimer
Journal of Financial Economics 134: 591-616, 2019.
The study probes how early-life exposure to financial institutions—or lack thereof—affects long-term financial outcomes. The authors observe that people from areas with limited access to banking facilities may enter credit markets later and struggle more with consumer finance. They focus on Native American reservations, many of which were inadvertently underserved due to Congressional legislation that shaped local financial development. This setup provides a natural experiment to understand whether formative exposure to local finance infrastructure influences individuals’ later financial behaviors and credit health.
To isolate the impact of early financial market exposure, the authors use legislative variation that caused uneven financial development across different reservations. By comparing individuals from reservations with robust banking services versus those from underserved areas, they analyze outcomes like the age at which individuals first engage with formal credit, their credit scores, and delinquency rates. The analysis is longitudinal, tracking individuals into adulthood and examining how long any disparities persist.
The findings are striking: individuals raised on financially underserved reservations enter the consumer credit market later in life and, as adults, exhibit persistent credit disadvantages. Specifically, these individuals score about 10 points lower in credit ratings and have a 4 percentage point increase in delinquent accounts compared to peers from areas with better early financial access. Moreover, the impact is comparable to a $6,000 reduction in annual personal income—a significant economic penalty tied solely to early access—or lack thereof—to financial institutions.
Crucially, these financial setbacks are long-lasting. Even after relocating to areas with better financial services, individuals who grew up without early access continue to lag in credit indicators—often for more than a decade. This slow convergence suggests that early exposure—or the lack thereof—to banking institutions shapes financial literacy, trust, and inclusion in deep and enduring ways.
The paper underscores the formative role of early-life environment in shaping later financial well-being. Access to local financial institutions during youth not only facilitates earlier engagement in credit systems but also fortifies long-term consumer credit outcomes. By demonstrating how institutional infrastructure—or its absence—can create significant, income-equivalent financial disparities, the study highlights the urgency of inclusive financial development and literacy. Policies that expand financial access in underserved communities could yield lasting improvements in financial health and equity.