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Do Entry Costs Provide an Empirical Basis for Poverty Traps? Evidence from Mexican Microenterprises

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Author Info
McKenzie, David J
Woodruff, Christopher

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Abstract

Recent theoretical literature in development economics has shown that nonconvex production technologies can result in low-growth poverty traps. This article uses detailed microenterprise surveys in Mexico to examine the empirical evidence for these nonconvexities at low levels of capital stock. While theory emphasizes nondivisible start-up costs that exceed the wealth of many potential entrepreneurs, this article shows start-up costs to be very low in some industries. Semiparametric methods are then used to flexibly estimate returns to capital in microenterprises. Much higher returns are found at low levels of capital stock than at higher levels, and this remains true after controlling for firm characteristics and measures of entrepreneurial ability. Overall, little evidence of production nonconvexities is found at low levels of capital. The absence of nonconvexities is a significant finding because it suggests that access to start-up capital does not determine the ultimate size of the enterprise.

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Publisher Info
Article provided by University of Chicago Press in its journal Economic Development and Cultural Change.

Volume (Year): 55 (2006)
Issue (Month): 1 (October)
Pages: 3-42
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Handle: RePEc:ucp:ecdecc:y:2006:v:55:i:1:p:3-42

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  1. Antman, Francisca & McKenzie, David J., 2005. "Poverty traps and nonlinear income dynamics with measurement error and individual heterogeneity," Policy Research Working Paper Series 3764, The World Bank. [Downloadable!]
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  2. Mathan Satchi & Jonathan Temple, 2006. "Growth and labour markets in developing countries," Bristol Economics Discussion Papers 06/581, Department of Economics, University of Bristol, UK. [Downloadable!]
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  3. L. Guiso & Fabiano Schivardi, 2006. "What determines entrepreneurial clusters?," Working Paper CRENoS 200616, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia. [Downloadable!]
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  4. David McKenzie & Yaye Seynabou Sakho, 2007. "Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability," IZA Discussion Papers 3179, Institute for the Study of Labor (IZA). [Downloadable!]
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  5. Karlan, Dean S. & Zinman, Jonathan, 2007. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," CEPR Discussion Papers 6071, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2008. "Are women more credit constrained ? experimental evidence on gender and microenterprise returns," Policy Research Working Paper Series 4746, The World Bank. [Downloadable!]
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  7. Michal Bauer & Julie Chytilová, 2007. "Does Education Matter in Patience Formation? Evidence from Ugandan Villages," Working Papers IES 2007/10, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2007. [Downloadable!]
  8. Bauer, Michal & Chytilová, Julie, 2009. "The Impact of Education on the Subjective Discount Rate in Ugandan Villages," IZA Discussion Papers 4057, Institute for the Study of Labor (IZA). [Downloadable!]
  9. Cull, Robert & Demirguc-Kunt, Asli & Morduch, Jonathan, 2008. "Microfinance meets the market," Policy Research Working Paper Series 4630, The World Bank. [Downloadable!]
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  10. Schündeln, Matthias, 2005. "Modeling Firm Dynamics to Identify the Cost of Financing Constraints in Ghanaian Manufacturing," Proceedings of the German Development Economics Conference, Kiel 2005 29, Verein für Socialpolitik, Research Committee Development Economics. [Downloadable!]
  11. Popli, Gurleen, 2006. "The rising wage inequality in Mexico, 1984-2000: A distributional analysis," MPRA Paper 399, University Library of Munich, Germany, revised 2006. [Downloadable!]
  12. Gertler, Paul & Martinez, Sebastian & Rubio-Codina, Marta, 2006. "Investing cash transfers to raise long term living standards," Policy Research Working Paper Series 3994, The World Bank. [Downloadable!]
  13. Kaivan Munshi, 2007. "From Farming to International Business: The Social Auspices of Entrepreneurship in a Growing Economy," NBER Working Papers 13065, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Loening, Josef & Rijkers, Bob & Soderbom, Mans, 2008. "Nonfarm microenterprise performance and the investment climate : evidence from rural Ethiopia," Policy Research Working Paper Series 4577, The World Bank. [Downloadable!]
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