Involuntary Entrepreneurship - Evidence from Thai Urban Data

We build and structurally estimate an occupational choice model between entrepreneurial and non-entrepreneurial alternatives. Unlike much of the literature, we explicitly model and distinguish between "involuntary" entrepreneurship, i.e., running own business out of necessity vs. running business because this is income-maximizing. Involuntary entrepreneurship arises for those who prefer the non-business occupation (e.g., wage-work) but cannot obtain it (with some probability that we estimate), due to lack of education, qualifications, or other labor market frictions. We also allow for credit constraints and analyze their interaction with the labor constraint. We estimate the model via GMM using the 2005 Townsend Thai urban survey. We find that 16% of all business households are classified as involuntary entrepreneurs. We use the structural estimates to evaluate the effect of relaxing the credit and labor constraints, and the impact of microcredit on the rate of entrepreneurship (voluntary and involuntary) and income, on average and stratified by wealth and schooling. Our results suggest that there are large potential income gains for poor households from relaxing both the labor and credit constraints or from providing access to microcredit, but the fraction of involuntary entrepreneurs can only be significantly reduced by addressing the labor constraint.