Who Wants to Be an Entrepreneur? Financial Development and Occupational Choice

63 Pages Posted: 14 Sep 2014 Last revised: 17 May 2016

Rajeev H. Dehejia

New York University (NYU) - Robert F. Wagner Graduate School of Public Service; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA); CESifo

Nandini Gupta

Indiana University - Kelley School of Business - Department of Finance

Date Written: May 16, 2016

Abstract

Theory suggests that access to finance facilitates entrepreneurship. However, evidence from randomized surveys of over one million individuals in India show instead that financial access shifts workers away from entrepreneurship into wage employment. Identifying access to finance using bank branch location determined by government policy, we find that individuals living in a district with greater access to finance are on average significantly less likely to be entrepreneurs in micro-enterprises and more likely to be formally employed. This shift is more pronounced for more educated workers. The results also show that individuals are paid higher wages on average in districts with more bank branches, and this effect is driven by those engaged in formal employment. To establish the firm-level channel, we use randomized surveys of over 400,000 service sector firms, and find that firms located in districts with more bank branches have significantly higher bank loans. The results indicate that firms in more financially developed districts are more productive, employ more workers, and pay higher wages on average, with the benefits mostly accruing to larger, formal sector firms. Our results suggests a mechanism by which financial development facilitates economic growth: by moving workers out of less productive, informal entrepreneurial activity into formal jobs in more productive firms.

Keywords: Financial development; Labor; Occupational Choice; Entrepreneurship

JEL Classification: G28, G32, G18

Suggested Citation

Dehejia, Rajeev H. and Gupta, Nandini, Who Wants to Be an Entrepreneur? Financial Development and Occupational Choice (May 16, 2016). NYU Wagner Research Paper No. 2494551. Available at SSRN: https://ssrn.com/abstract=2494551 or http://dx.doi.org/10.2139/ssrn.2494551

Rajeev H. Dehejia

New York University (NYU) - Robert F. Wagner Graduate School of Public Service ( email )

The Puck Building
295 Lafayette Street, Second Floor
New York, NY 10012
United States

HOME PAGE: http://users.nber.org/~rdehejia/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://users.nber.org/~rdehejia/

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Nandini Gupta (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3416 (Phone)
812-855-5875 (Fax)

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