Liquidity Constraints, Spillovers, and Entrepreneurship: Evidence from a Cash Transfer Program

Abstract

This paper exploits a welfare programme in Brazil to investigate the role of financial constraints, in opposition to general equilibrium mechanisms, in explaining entrepreneurship. A method for decomposing its impact into direct and indirect effects is presented. Instead of requiring two-level randomization, this method only assumes cluster-level independence of treatment. Results indicate that the number of formal entrepreneurs increased, but only due to the indirect component. Further tests suggest that the indirect effect is associated with an increase in private transfers between households. Thus entrepreneurship tends to respond more to the interaction between households than to financial constraints.

Keywords: Entrepreneurship, Financial Constraint, Eligibility Constraint, Cash Transfer, Indirect Treatment Effect, Private Transfers

JEL Classification: C21, H31, I38, J24, L26, O17