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Credit Rationing, Risk Aversion and Industrial Evolution in Developing Countries

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Author Info
Eric Bond
James R. Tybout
Hâle Utar

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Abstract

Relative to their counterparts in high-income regions, entrepreneurs in developing countries face less efficient financial markets, more volatile macroeconomic conditions, and higher entry costs. This paper develops a dynamic empirical model that links these features of the business environment to firm ownership patterns, firm size distributions, productivity distributions, borrowing patterns, and cross-household savings behavior. Applied to panel data on Colombian apparel producers, the model yields econometric estimates of a credit market imperfection index, the sunk costs of creating a new business, and various other parameters. It also provides a basis for several counterfactual experiments. These show, inter alia, that an efficient credit market would improve the weighted-average efficiency of producers by about 5 percent, partly by allowing the most productive producers to expand and partly by reducing the incentives for inefficient firms to remain in the market. The gains from better intermediation accrue mainly during periods of macro volatility, and mainly to households with modest wealth but high entrepreneurial ability.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14116.

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Date of creation: Jun 2008
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Handle: RePEc:nbr:nberwo:14116

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Find related papers by JEL classification:
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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  29. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August. [Downloadable!] (restricted)
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