Liquidity, Risk, and Occupational Choices
31 Pages Posted: 16 Mar 2011
Date Written: December 23, 2010
We explore which financial constraints matter the most in the choice of becoming an entrepreneur. We consider a randomly assigned welfare program in rural Mexico and show that cash transfers significantly increase entry into entrepreneurship. We then exploit the cross-household variation in the timing of these transfers and find that current occupational choices are significantly more responsive to the transfers expected for the future than to those currently received. Guided by a simple occupational choice model, we argue that the program has promoted entrepreneurship by enhancing the willingness to bear risk as opposed to simply relaxing current liquidity constraints.
Keywords: Financial constraints, entrepreneurship, insurance, liquidity
JEL Classification: O16, G20, L26
Suggested Citation: Suggested Citation