Subsistence Entrepreneurs and Misallocation

Kevin Donovan
Additional contact information
Kevin Donovan: University of Notre Dame

No 771, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: Empirical evidence suggests that many individuals in developing countries operate businesses not due to some superior skill or idea, but because they lack the opportunity to become salaried employees. In a model with incomplete markets, occupational choice, and frictional job search, I argue that this is due to the interaction of low unemployment benefits and financial market underdevelopment. The resulting misallocation along the extensive margin between salaried positions and business ownership generates a larger left tail of firm size and a significantly smaller quantitative impact of targeted lending to poor entrepreneurs. Model predictions are then tested with individual-level surveys of both Chilean and Mexican microenterprise owners. Evidence shows that misallocated owners have lower profit conditional on observable inputs and are more likely to have left their last salaried position involuntarily. Both are consistent with the model.

Date: 2014
New Economics Papers: this item is included in nep-dge and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2014/paper_771.pdf (application/pdf)

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:red:sed014:771

Access Statistics for this paper

More papers in 2014 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().