Monitoring Costs, Credit Constraints and Entrepreneurship

27 Pages Posted: 18 Jul 2016

See all articles by Sanjay Banerji

Sanjay Banerji

University of Nottingham

Rajesh Raj

Sikkim University

Kunal Sen

University of Manchester

Date Written: September 2016


Access to finance is seen as a binding constraint on the growth of household enterprises in developing countries. We develop a principal agent model of a household enterprise and show that limited access to finance and monitoring costs constrain the firm size via both a direct and indirect effect. Although greater access to finance has a positive direct effect on the hiring of paid labour, firms may not choose to expand and use paid labour via an indirect route that operates through the monitoring costs of employing paid workers. We use large nationally representative surveys of household enterprises in Indian manufacturing and find support for the predictions of our theory.

Suggested Citation

Banerji, Sanjay and Raj, Rajesh and Sen, Kunal, Monitoring Costs, Credit Constraints and Entrepreneurship (September 2016). The Manchester School, Vol. 84, Issue 5, pp. 573-599, 2016, Available at SSRN: or

Sanjay Banerji (Contact Author)

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Rajesh Raj

Sikkim University

6th Mile
Samdur, Tadong
Gangtok, SC 737102

Kunal Sen

University of Manchester ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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