When You Can’t Afford to Wait for a Job: The Role of Time Discounting for Own-Account Workers in Developing Countries

Frictional labor markets impose a fundamental trade-off: individuals may work on their own at any time but can take a potentially better-paid wage job only after spending some time looking for it, suggesting that intertemporal considerations affect how people choose their occupation. We formalize this intuition under the job-search framework and show that a sufficiently high subjective discount rate can justify the choice for own-account work even when it pays less than wage work. With this simple model, we estimate the lowest discount rate that is consistent with the occupational choice of urban own-account workers in Brazil. We find that at least 65% of these workers appear to discount the future at rates superior to those available in the formal credit market, which suggests constrained occupational choice. Finally, we show that our estimated lower bound of the time preference is positively associated with food, clothing, and housing deprivation.