Credit Rationing, Risk Aversion and Industrial Evolution in Developing Countries
53 Pages Posted: 22 Jun 2008 Last revised: 27 Jan 2022
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Credit Rationing, Risk Aversion and Industrial Evolution in Developing Countries
Credit Rationing, Risk Aversion, and Industrial Evolution in Developing Countries
Date Written: June 2008
Abstract
Relative to their counterparts in high-income regions, entrepreneurs in developing countries face less efficient financial markets, more volatile macroeconomic conditions, and higher entry costs. This paper develops a dynamic empirical model that links these features of the business environment to cross-firm productivity distributions, entrepreneurs' welfare, and patterns of industrial evolution. Applied to panel data on Colombian apparel producers, the model yields econometric estimates of a credit market imperfection index, the sunk costs of creating a new business, and a risk aversion index (inter alia). Model-based counterfactual experiments suggest that improved intermediation could dramatically increase the return on assets for entrepreneurial households with modest wealth, and that the gains are particularly large when the macro environment is relatively volatile.
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