Do Entry Costs Provide an Empirical Basis for Poverty Traps? Evidence from Mexican Microenterprises

David McKenzie and Christopher Woodruff

Economic Development and Cultural Change, 2006, vol. 55, issue 1, 3-42

Abstract: Recent theoretical literature in development economics has shown that nonconvex production technologies can result in low-growth poverty traps. This article uses detailed microenterprise surveys in Mexico to examine the empirical evidence for these nonconvexities at low levels of capital stock. While theory emphasizes nondivisible start-up costs that exceed the wealth of many potential entrepreneurs, this article shows start-up costs to be very low in some industries. Semiparametric methods are then used to flexibly estimate returns to capital in microenterprises. Much higher returns are found at low levels of capital stock than at higher levels, and this remains true after controlling for firm characteristics and measures of entrepreneurial ability. Overall, little evidence of production nonconvexities is found at low levels of capital. The absence of nonconvexities is a significant finding because it suggests that access to start-up capital does not determine the ultimate size of the enterprise.

Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (166)

Downloads: (external link)
http://dx.doi.org/10.1086/505725 (application/pdf)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:ecdecc:y:2006:v:55:i:1:p:3-42

Access Statistics for this article

More articles in Economic Development and Cultural Change from University of Chicago Press
Bibliographic data for series maintained by Journals Division (pubtech@press.uchicago.edu).