Entrepreneurship,Informality,and Preference Heterogeneity within Small and Micro-Businesses in India

In this study, to deepen our understanding of the role of entrepreneurship in economic development, we examine individual and social preferences of small and micro entrepreneurs in Delhi, India, and their relationship with firm performance. We compare the following three sectors : traditional and informal manufacturing and service sectors, traditional and formal entrepreneurs in those sectors, and modern and formal entrepreneurs in the information technology（IT）industry. The analysis combines three types of data from the same entrepreneurs :（1）incentivized artefactual field experiments to elicit their inherent preferences ;（2）non-incentivized trust questions following the General Social Survey style ; and（3）structured panel surveys of entrepreneursʼ socioeconomic backgrounds, firm characteristics, and firm performance. The descriptive analysis reveals that the three types of entrepreneurs are significantly different in terms of trust levels and experimentally elicited preference such as risk and time preferences, altruism, and leadership. We also find that across the three sectors, risk, time, and leadership preferences have heterogeneous relationships with firm performance measured by innovation, sales, and profit. In the competitive IT industry, firms that are led by risk-seeking entrepreneurs with flexibility to adjust their risk taking as a leader performed better. In contrast, in traditional, industries, those preferences worked in the opposite direction, possibly reflecting market distortions.