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Liquidity, risk and occupational choices

Author

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  • Milo Bianchi

    () (UP9 - Université Paris 9, Dauphine - Université Paris-Dauphine)

  • Matteo Bobba

    (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - ENS Paris - École normale supérieure - Paris, PSE - Paris School of Economics)

Abstract

We explore whether financial constraints matter and which financial constraints matter the most in the choice of becoming an entrepreneur. We exploit a randomly assigned welfare program in rural Mexico to show that cash transfers significantly increase entry into entrepreneurship, thereby providing evidence of financial constraints. We then develop a simple model to highlight how liquidity and insurance constraints respond differently to the time profile of expected cash transfers. Exploiting the cross-households variation in the timing of these transfers, we find that current occupational choices are significantly more responsive to the amount of transfers expected for the future than to the amount of transfers currently received. We interpret these findings as evidence that the program has been effective in promoting micro-entrepreneurship by enhancing the willingness to bear risk.

Suggested Citation

  • Milo Bianchi & Matteo Bobba, 2010. "Liquidity, risk and occupational choices," PSE Working Papers halshs-00564918, HAL.
  • Handle: RePEc:hal:psewpa:halshs-00564918
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00564918
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    References listed on IDEAS

    as
    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. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 423-423.
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    Cited by:

    1. Avitabile,Ciro & Bobba,Matteo & Pariguana,Marco, 2015. "High school track choice and financial constraints : evidence from urban Mexico," Policy Research Working Paper Series 7427, The World Bank.
    2. repec:eee:wdevel:v:107:y:2018:i:c:p:111-124 is not listed on IDEAS
    3. Fitz, Dylan, 2013. "Development Chutes and Ladders: A Joint Impact Evaluation of Asset and Cash Transfers in Brazil," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150254, Agricultural and Applied Economics Association.
    4. Alessandro Tondini & Cally Ardington & Ingrid Woolard, 2017. "Public pensions and elderly informal employment: Evidence from a change in retirement age in South Africa," SALDRU Working Papers 206, Southern Africa Labour and Development Research Unit, University of Cape Town.
    5. Marco Caliendo & Jens Hogenacker & Steffen Künn & Frank Wießner, 2015. "Subsidized start-ups out of unemployment: a comparison to regular business start-ups," Small Business Economics, Springer, vol. 45(1), pages 165-190, June.
    6. Caliendo, Marco & Künn, Steffen & Weißenberger, Martin, 2016. "Personality traits and the evaluation of start-up subsidies," European Economic Review, Elsevier, vol. 86(C), pages 87-108.
    7. Zhang, Chuanchuan & Zhao, Jianmei, 2017. "Internet Usage and Rural Entrepreneurship in China," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258521, Agricultural and Applied Economics Association.
    8. Imbert, Clément & Papp, John, 2016. "Short-term Migration Rural Workfare Programs and Urban Labor Markets - Evidence from India," The Warwick Economics Research Paper Series (TWERPS) 1116, University of Warwick, Department of Economics.
    9. Harold Alderman & Ruslan Yemtsov, 2014. "How Can Safety Nets Contribute to Economic Growth?," World Bank Economic Review, World Bank Group, vol. 28(1), pages 1-20.
    10. Bobba, Matteo & Flabbi, Luca & Levy Algazi, Santiago, 2017. "Labor Market Search, Informality and Schooling Investments," IZA Discussion Papers 11170, Institute for the Study of Labor (IZA).
    11. Falco, Paolo, 2014. "Does risk matter for occupational choices? Experimental evidence from an African labour market," Labour Economics, Elsevier, vol. 28(C), pages 96-109.
    12. Shenoy, Ajay, 2014. "Risky Income or Lumpy Investments? Evidence on Two Theories of Under-Specialization," Santa Cruz Department of Economics, Working Paper Series qt4649j8k0, Department of Economics, UC Santa Cruz.
    13. Avitabile, Ciro & Bobba, Matteo & Pariguana, Marco, 2017. "High School Track Choice and Liquidity Constraints: Evidence from Urban Mexico," IZA Discussion Papers 10506, Institute for the Study of Labor (IZA).
    14. Bruhn, Miriam & Zia, Bilal, 2011. "Stimulating managerial capital in emerging markets : the impact of business and financial literacy for young entrepreneurs," Policy Research Working Paper Series 5642, The World Bank.
    15. Bazzi, Samuel & Sumarto, Sudarno & Suryahadi, Asep, 2015. "It's all in the timing: Cash transfers and consumption smoothing in a developing country," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 267-288.
    16. Escobal, Javier & Benites, Sara, 2012. "Algunos impactos del programa JUNTOS en el bienestar de los niños: Evidencia basada en el estudio Niños del Milenio
      [Impacts of the Conditional Cash Transfer programme JUNTOS for children in Peru]
      ," MPRA Paper 56480, University Library of Munich, Germany.
    17. Cristina Cirillo & Giorgia Giovannetti, 2018. "Do Cash Transfers Trigger Investment? Evidence for Peru," Development Working Papers 433, Centro Studi Luca d'Agliano, University of Milano, revised 29 Jan 2018.
    18. Jensen, Nathaniel & Barrett, Christopher B. & Mude, Andrew, 2014. "Index Insurance and Cash Transfers: A Comparative Analysis from Northern Kenya," MPRA Paper 61372, University Library of Munich, Germany.
    19. Andrew D. Foster & Esther Gehrke, 2017. "Consumption Risk and Human Capital Accumulation in India," NBER Working Papers 24041, National Bureau of Economic Research, Inc.

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    Keywords

    financial constraints; entrepreneurship; insurance; liquidity;

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