Effects of credit and labor constraints on microenterprises and the unintended impact of changes in household endowments: Use of threshold estimation to detect heterogeneity

Bidisha Lahiri and Richard Daramola

The Quarterly Review of Economics and Finance, 2023, vol. 88, issue C, 21-38

Abstract: Household labor and household credit are strong proxies for constraints faced by household operated microenterprises. Threshold estimation uncovers heterogeneity of these household factor-endowment effects in determining the existence of rural households’ microenterprise initiatives. Our paper finds that for low-income households, the labor constraints are weaker and the capital constraints are stronger compared to the relatively wealthier households. We also examine a comparative static effect of tighter labor constraints and simultaneous relaxed financial constraints using a natural experiment of a government workfare program. The results indicate that every additional day spent by a household in the workfare program significantly reduced the probability of the household to engage in microenterprise. However, the microenterprises for the poorer households experienced a smaller negative effect as predicted, based on higher prevalence of disguised unemployment and stronger benefits of additional credit for the low-income households. Alternate estimation techniques and robustness checks support the results.

Keywords: Credit and labor constraints; Microenterprise development; Workfare program; Household heterogeneity; Threshold estimation (search for similar items in EconPapers)
JEL-codes: D10 D22 J22 J48 O12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:88:y:2023:i:c:p:21-38

DOI: 10.1016/j.qref.2022.12.008

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