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Liquidity constraints, spillovers, and entrepreneurship: evidence from a cash transfer program

Rafael P. Ribas ()
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Rafael P. Ribas: University of Amsterdam

Small Business Economics, 2020, vol. 55, issue 4, No 15, 1158 pages

Abstract: Abstract This paper exploits a liquidity shock from a welfare program in Brazil to investigate the role of financial constraints, in opposition to general equilibrium mechanisms, in explaining entrepreneurship. Previous research focuses exclusively on how liquidity changes recipients’ behavior through direct effects on reducing constraints. However, liquidity shocks may also produce spillovers from recipients to others and thereby indirectly affect entrepreneurial decisions. This paper presents a method for decomposing the liquidity shock into direct effects associated with relieving individual constraints, and indirect effects associated with spillovers to other individuals. Results suggest that the program, which assists 20 percent of Brazilian households, increased the number of small entrepreneurs by 10 percent. However, this increase is entirely driven by the indirect effect. Further tests suggest that this effect is associated with an increase in private transfers between households. Thus, entrepreneurship tends to respond more to the interaction between households than to financial constraints.

Keywords: Entrepreneurship; Financial constraint; Cash transfers; Informality; Indirect effect; Private transfers (search for similar items in EconPapers)
JEL-codes: C21 H31 I38 J24 R28 R51 L26 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11187-019-00178-1

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