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Unlocking Productive Entrepreneurship in Ethiopia: Which Incentives Matter?

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  • Zuzana Brixiova

    ()

  • Emerta Asaminew

Abstract

Twenty years after the launch of market reforms, productive entrepreneurship and vibrant small and medium-sized enterprises (SMEs) in Ethiopia remain limited, the recent growth acceleration notwithstanding. This paper develops a model of entrepreneurial start ups in an economy with frictions in the product and labor markets and a large informal sector, which characterize the Ethiopian institutional landscape. It then examines several mitigating policies that could improve the suboptimal outcomes. The main findings are that search subsidies would be more effective in encouraging entrepreneurial start ups than wage subsidies, although fewer entrepreneurs may choose to operate in the formal sector than under the latter. Regarding the reform agenda,priority should be put on removing rigidities and establishing property rights. To be effective,both types of subsidies should have a time limit and be phased out with reforms of the business environment, strengthened property rights, and improved labor markets.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp1000.

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Length: pages
Date of creation: 01 Oct 2010
Date of revision:
Handle: RePEc:wdi:papers:2010-1000

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Keywords: Model of skills and start ups; labor markets; frictions; informal sector; Africa;

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