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Liquidity, Risk, and Occupational Choices

  • Matteo Bobba

We explore which financial constraints matter most in the choice of becoming an entrepreneur. We consider a randomly assigned welfare programme in rural Mexico and show that cash transfers significantly increase entry into entrepreneurship. We then exploit cross-household variation in the timing of these transfers and find that current occupational choices are significantly more responsive to the transfers expected for the future than to those currently received. Guided by a simple occupational choice model, we argue that the programme has promoted entrepreneurship by enhancing willingness to bear risk as opposed to simply relaxing current liquidity constraints. Copyright 2013, Oxford University Press.

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Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 80 (2013)
Issue (Month): 2 ()
Pages: 491-511

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Handle: RePEc:oup:restud:v:80:y:2013:i:2:p:491-511
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  1. 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.
  2. Esther Duflo & Abhijit Banerjee, 2008. "What is Middle Class About the Middle Classes Around the World?," Working Papers id:1363, eSocialSciences.
  3. Hausmann, Ricardo & Rodrik, Dani, 2002. "Economic Development as Self-Discovery," Working Paper Series rwp02-023, Harvard University, John F. Kennedy School of Government.
  4. Banerjee, Abhijit V. & Duflo, Esther, 2005. "Growth Theory through the Lens of Development Economics," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 7, pages 473-552 Elsevier.
  5. Paul J. Gertler & Sebastian W. Martinez & Marta Rubio-Codina, 2012. "Investing Cash Transfers to Raise Long-Term Living Standards," American Economic Journal: Applied Economics, American Economic Association, vol. 4(1), pages 164-92, January.
  6. Stefan Dercon & Luc Christiaensen, 2007. "Consumption risk, technology adoption and poverty traps: evidence from Ethiopia," Economics Series Working Papers WPS/2007-06, University of Oxford, Department of Economics.
  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. 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.
  9. Gine, Xavier & Yang, Dean, 2007. "Insurance, credit, and technology adoption : field experimental evidence from Malawi," Policy Research Working Paper Series 4425, The World Bank.
  10. 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.
  11. 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.
  12. 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.
  13. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Harvard Institute of Economic Research Working Papers 1727, Harvard - Institute of Economic Research.
  14. repec:oup:qjecon:v:121:y:2006:i:2:p:635-672 is not listed on IDEAS
  15. repec:oup:qjecon:v:123:y:2008:i:4:p:1329-1372 is not listed on IDEAS
  16. Ray, Debraj, 2007. "Introduction to development theory," Journal of Economic Theory, Elsevier, vol. 137(1), pages 1-10, November.
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