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Liquidity, Risk, and Occupational Choices

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  • Bobba, Matteo
  • Bianchi, Milo

Abstract

We explore which financial constraints matter the most in the choice of becoming an entrepreneur. We consider a randomly assigned welfare program in rural Mexico and show that cash transfers signi cantly increase entry into entrepreneurship. We then exploit the cross-household variation in the timing of these transfers and nd that current occupational choices are signi cantly more responsive to the transfers expected for the future than to those currently received. Guided by a simple occu- pational choice model, we argue that the program has promoted entrepreneurship by enhancing the willingness to bear risk as opposed to simply relaxing current liquidity constraints.

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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/5380.

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Date of creation: Apr 2013
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Publication status: Published in Review of Economic Studies, 2013, Vol. 80, no. 2. pp. 491-511.Length: 20 pages
Handle: RePEc:dau:papers:123456789/5380

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Keywords: insurance; entrepreneurship; Financial constraints; liquidity;

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  1. Suresh de Mel & David McKenzie & Christopher Woodruff, 2008. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1329-1372, November.
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  3. Morduch, J., 1995. "Income Smoothing and Consumption Smoothing," Papers, Harvard - Institute for International Development 512, Harvard - Institute for International Development.
  4. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(2), pages 635-672, May.
  5. Banerjee, Abhijit V. & Duflo, Esther, 2005. "Growth Theory through the Lens of Development Economics," Handbook of Economic Growth, Elsevier, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 7, pages 473-552 Elsevier.
  6. Paul Schultz, T., 2004. "School subsidies for the poor: evaluating the Mexican Progresa poverty program," Journal of Development Economics, Elsevier, Elsevier, vol. 74(1), pages 199-250, June.
  7. Skoufias, Emmanuel & di Maro, Vincenzo, 2006. "Conditional cash transfers, adult work incentives, and poverty," Policy Research Working Paper Series 3973, The World Bank.
  8. Stefan Dercon & Luc Christiaensen, 2008. "Consumption risk, technology adoption and poverty traps: evidence from Ethiopia," WEF Working Papers, ESRC World Economy and Finance Research Programme, Birkbeck, University of London 0035, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  9. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(4), pages 719-48, August.
  10. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
  11. Scott Shane, 2009. "Why encouraging more people to become entrepreneurs is bad public policy," Small Business Economics, Springer, Springer, vol. 33(2), pages 141-149, August.
  12. Gin, Xavier & Yang, Dean, 2009. "Insurance, credit, and technology adoption: Field experimental evidencefrom Malawi," Journal of Development Economics, Elsevier, Elsevier, vol. 89(1), pages 1-11, May.
  13. Ray, Debraj, 2007. "Introduction to development theory," Journal of Economic Theory, Elsevier, Elsevier, vol. 137(1), pages 1-10, November.
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Cited by:
  1. Imbert, Clément, 2013. "Travailler pour être aidé? L’emploi garanti en Inde," Opuscules du CEPREMAP, CEPREMAP, CEPREMAP, number 33, May.
  2. Escobal, Javier & Benites, Sara, 2012. "Algunos impactos del programa JUNTOS en el bienestar de los niños: Evidencia basada en el estudio Niños del Milenio
    [Impacts of the Conditional Cash Transfer programme JUNTOS for children in Peru
    ," MPRA Paper 56480, University Library of Munich, Germany.
  3. Fitz, Dylan, 2013. "Development Chutes and Ladders: A Joint Impact Evaluation of Asset and Cash Transfers in Brazil," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 150254, Agricultural and Applied Economics Association.
  4. Alderman, Harold & Yemtsov, Ruslan, 2013. "How can safety nets contribute to economic growth ?," Policy Research Working Paper Series 6437, The World Bank.
  5. Bruhn, Miriam & Zia, Bilal, 2011. "Stimulating managerial capital in emerging markets : the impact of business and financial literacy for young entrepreneurs," Policy Research Working Paper Series 5642, The World Bank.

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