Who Wants to Be an Entrepreneur? Financial Development and Occupational Choice
63 Pages Posted: 14 Sep 2014 Last revised: 17 May 2016
Date Written: May 16, 2016
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: Suggested Citation