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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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Bibliographic Info

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. Skoufias, Emmanuel & di Maro, Vincenzo, 2006. "Conditional cash transfers, adult work incentives, and poverty," Policy Research Working Paper Series 3973, The World Bank.
  2. Hausmann, Ricardo & Rodrik, Dani, 2003. "Economic development as self-discovery," Journal of Development Economics, Elsevier, vol. 72(2), pages 603-633, December.
  3. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
  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, vol. 121(2), pages 635-672, May.
  5. Stefan Dercon & Luc Christiaensen, 2008. "Consumption risk, technology adoption and poverty traps: evidence from Ethiopia," WEF Working Papers 0035, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  6. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Harvard Institute of Economic Research Working Papers 1727, Harvard - Institute of Economic Research.
  7. 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, vol. 123(4), pages 1329-1372, November.
  8. Ray, Debraj, 2007. "Introduction to development theory," Journal of Economic Theory, Elsevier, vol. 137(1), pages 1-10, November.
  9. Paul Schultz, T., 2004. "School subsidies for the poor: evaluating the Mexican Progresa poverty program," Journal of Development Economics, Elsevier, vol. 74(1), pages 199-250, June.
  10. Scott Shane, 2009. "Why encouraging more people to become entrepreneurs is bad public policy," Small Business Economics, Springer, vol. 33(2), pages 141-149, August.
  11. 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, vol. 87(4), pages 719-48, August.
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Cited by:
  1. 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.
  2. 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. 150254, Agricultural and Applied Economics Association.
  3. Alderman, Harold & Yemtsov, Ruslan, 2013. "How can safety nets contribute to economic growth ?," Policy Research Working Paper Series 6437, The World Bank.

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