Equity and Incentives in Human Capital Investment: Evidence from a Randomized Experiment

We randomly offer existing ISA enrollees the opportunity to lower their pledged income shares by 5 or 10 percentage points in exchange for flat monthly fees ranging from 1,000 to 400,000 pesos. To identify moral hazard, we estimate the treatment effect of accepting a contract with a lower income-share obligation, using contract offers as instruments. To identify adverse selection, we compare individuals who received different menus of offers but ultimately pledged the same income share.

The start date for Wave 1 implementation is 2020-12-09
The start date for Wave 2 implementation is 2022-05-16

2020-12-09

2021-07-15

Repayment amount and frequency; income and employment; elicited risk preferences and earnings expectations

Risk/time preferences and earning expectations will be gathered using a survey with questions modeled after the Survey of Consumer Finances (SCF).

GPA and graduation rates; college institution, program, and major choice; industry and occupation;

Note that, because we're interested in estimating adverse selection, some "outcomes" describe borrowers before the intervention. These "outcomes" would not be used to estimate treatment (moral hazard) effects.

Our experiment involves randomly extending revised contract offerings to graduates enrolled in Lumni ISAs. These contract offerings will take the form of “discounts” to income-share obligations in exchange for an additional up-front payment.

Consider an ISA enrollee three years after graduation who is obligated to pay 15 percent of her annual income to Lumni over the next two years. In the first wave of the experiment, one experimental treatment would offer that student a revised contract reducing her income-share obligation to 10 percent in exchange for an additional 70,000 pesos per month. Another treatment offers the same five-percentage-point reduction for 1,000 pesos, and another treatment group offers a ten-percentage-point reduction for 70,000 pesos.

In the second wave of the experiment, we extend another offer to the same sample of ISA enrollees eighteen months after the initial treatment. Within each of the four initial experimental groups, we randomly offer income-share reductions of 5pp to one half and 10pp to the other half. We then determine flat monthly payments by randomizing the "valuation" placed on each individual's income in pesos-per-income-share. For example, a valuation of 1 million pesos would require a flat payment of 100,000 pesos for a 10pp income-share reduction or 50,000 pesos for a 5pp income-share reduction.

randomization done in office by a computer

Individual

No

126 ISA enrollees

126 ISA enrollees

Wave 1:
Control: No revised contract offered, N = 46
Treatment 1: ISA reduction=10%, Flat Monthly Payment=70,000 pesos, N = 40
Treatment 2: ISA reduction=5%, Flat Monthly Payment=70,000 pesos, N = 30
Treatment 3: ISA reduction=5%, Flat Monthly Payment=1,000 pesos, N = 10

Wave 2:
Treatment 1: ISA reduction=5%, Flat Monthly Payment=25,000 pesos, N = 19
Treatment 2: ISA reduction=5%, Flat Monthly Payment=50,000 pesos, N = 10
Treatment 3: ISA reduction=5%, Flat Monthly Payment=100,000 pesos, N = 13
Treatment 4: ISA reduction=5%, Flat Monthly Payment=200,000 pesos, N = 20

Treatment 5: ISA reduction=10%, Flat Monthly Payment=50,000 pesos, N = 19
Treatment 6: ISA reduction=10%, Flat Monthly Payment=100,000 pesos, N = 15
Treatment 7: ISA reduction=10%, Flat Monthly Payment=200,000 pesos, N = 11
Treatment 8: ISA reduction=10%, Flat Monthly Payment=400,000 pesos, N = 18