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Liquidity, risk and occupational choices

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Author Info

  • Milo Bianchi

    (UP9 - Université Paris 9, Dauphine - Université Paris IX - Paris Dauphine)

  • Matteo Bobba

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

We explore whether financial constraints matter and which financial constraints matter the most in the choice of becoming an entrepreneur. We exploit a randomly assigned welfare program in rural Mexico to show that cash transfers significantly increase entry into entrepreneurship, thereby providing evidence of financial constraints. We then develop a simple model to highlight how liquidity and insurance constraints respond differently to the time profile of expected cash transfers. Exploiting the cross-households variation in the timing of these transfers, we find that current occupational choices are significantly more responsive to the amount of transfers expected for the future than to the amount of transfers currently received. We interpret these findings as evidence that the program has been effective in promoting micro-entrepreneurship by enhancing the willingness to bear risk.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00564918.

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Date of creation: Oct 2010
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Handle: RePEc:hal:psewpa:halshs-00564918

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Keywords: financial constraints ; entrepreneurship ; insurance; liquidity;

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  1. Ricardo Hausmann & Dani Rodrik, 2002. "Economic Development as Self-Discovery," NBER Working Papers 8952, National Bureau of Economic Research, Inc.
  2. Gin, Xavier & Yang, Dean, 2009. "Insurance, credit, and technology adoption: Field experimental evidencefrom Malawi," Journal of Development Economics, Elsevier, vol. 89(1), pages 1-11, May.
  3. Dercon, Stefan & Christiaensen, Luc, 2007. "Consumption risk, technology adoption, and poverty traps : evidence from Ethiopia," Policy Research Working Paper Series 4257, The World Bank.
  4. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-114, Summer.
  5. Nava Ashaf & Dean Karlan & Wesley Yin, 2004. "Tying odysseus to the mast: Evidence from a commitment savings product in the philippines," Natural Field Experiments 00206, The Field Experiments Website.
  6. 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.
  7. 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.
  8. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2007. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," IZA Discussion Papers 2934, Institute for the Study of Labor (IZA).
  9. Emmanuel Skoufias & Vincenzo Di Maro, 2008. "Conditional Cash Transfers, Adult Work Incentives, and Poverty," Journal of Development Studies, Taylor & Francis Journals, vol. 44(7), pages 935-960.
  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. Ray, Debraj, 2007. "Introduction to development theory," Journal of Economic Theory, Elsevier, vol. 137(1), pages 1-10, November.
  12. 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.
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Cited by:
  1. Imbert, Clément, 2013. "Travailler pour être aidé? L’emploi garanti en Inde," Opuscules du 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. Alderman, Harold & Yemtsov, Ruslan, 2013. "How can safety nets contribute to economic growth ?," Policy Research Working Paper Series 6437, The World Bank.
  4. 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.
  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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