Barriers to Entry and Returns to Capital in Informal Activities: Evidence from Sub-Saharan Africa

27 Pages Posted: 10 May 2011

See all articles by Michael Grimm

Michael Grimm

Erasmus University Rotterdam; University of Passau; IZA; DIW Berlin

Jens Kruger

Asian Development Bank

Jann Lay

GIGA German Institute of Global and Area Studies; University of Goettingen

Date Written: May 2011

Abstract

This paper investigates the patterns of capital entry barriers and capital returns in informal micro and small enterprises (MSEs) using a unique micro dataset for seven West African countries. Our findings support the view of a heterogeneous informal sector that is not primarily host to subsistence activities. While an assessment of initial investment identifies some informal activities with negligible entry barriers, a notable cost of entry is associated with most activities. We find very heterogeneous patterns of capital returns in informal MSEs. At very low levels of capital, marginal returns are extremely high - often exceeding 70 percent per month. Above a capital stock of 150 International Dollars, marginal returns are found to be relatively low at around 47 percent monthly. We provide some evidence that the high returns at low capital stocks reflect high risks. At the same time, most MSEs appear to be severely capital constrained.

Keywords: informal enterprises, entry barriers, returns to capital

JEL Classification: D22, D24, O12, O17

Suggested Citation

Grimm, Michael and Kruger, Jens and Lay, Jann, Barriers to Entry and Returns to Capital in Informal Activities: Evidence from Sub-Saharan Africa (May 2011). Review of Income and Wealth, Vol. 57, pp. S27-S53, 2011. Available at SSRN: https://ssrn.com/abstract=1837194 or http://dx.doi.org/10.1111/j.1475-4991.2011.00453.x

Michael Grimm (Contact Author)

Erasmus University Rotterdam ( email )

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University of Passau ( email )

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IZA ( email )

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DIW Berlin ( email )

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Jens Kruger

Asian Development Bank

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Metro Manila
Philippines

Jann Lay

GIGA German Institute of Global and Area Studies ( email )

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Hamburg, DE D-20354
Germany

University of Goettingen

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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