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Financial constraints and occupational choice in Thai villages

Alexander Karaivanov ()

Journal of Development Economics, 2012, vol. 97, issue 2, 201-220

Abstract: Financial constraints and entrepreneurship are key factors affecting economic performance in developing countries. I formulate and solve a model of occupational choice with moral hazard under three alternative financial market environments: savings only, borrowing and lending with default and moral hazard constrained insurance. I use computationally efficient techniques based on mechanism design, genetic algorithms and maximum likelihood to estimate and statistically test these models of financial constraints. Using occupational choice data from Thai villages I find evidence that the saving only regime is rejected in favor of regimes allowing for borrowing and/or insurance, especially in higher-wealth data stratifications. A direct test between the borrowing and insurance regimes reveals that neither can be rejected in favor of the other. Allowing ex-ante lotteries over wealth improves the explanatory power of the model. I also find evidence for differences in the best fitting regimes by region, wealth, and access to formal credit.

Keywords: Occupational choice; Financial constraints; Maximum likelihood (search for similar items in EconPapers)
JEL-codes: O12 C52 D82 (search for similar items in EconPapers)
Date: 2012
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