Liquidity constraints, spillovers, and entrepreneurship: evidence from a cash transfer program
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Liquidity constraints, spillovers, and entrepreneurship: evidence from a cash transfer program Rafael P. Ribas
Accepted: 30 April 2019 © The Author(s) 2019
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
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11187-019-00178-1) contains supplementary material, which is available to authorized users. R. P. Ribas () Amsterdam Business School, University of Amsterdam, Plantage Muidergracht 12, 1018 TV Amsterdam, Netherlands e-mail: [email protected]
respond more to the interaction between households than to financial constraints. Keywords Entrepreneurship · Financial constraint · Cash transfers · Informality · Indirect effect · Private transfers JEL Classification C21 · H31 · I38 · J24 · R28 · R51 · L26
1 Introduction There has been a long debate over whether insufficient liquidity hinders individuals from starting their own business. In general, the literature suggests that financial constraints tend to inhibit those with insufficient funds at their disposal.1 Under imperfect financial markets, individual savings could be the way
1 A non-exhaustive list of papers includes Evans and Jovanovic (1989), Evans and Leighton (1989), Holtz-Eakin et al. (1994), Lindh and Ohlsson (1996), Blanchflower and Oswald (1998), Blanchflower et al. (2001), Lindh and Ohlsson (1998), Fairlie (1999), Johansson (2000), Taylor (2001), Hurst and Lusardi (2004), Holtz-Eakin and Rosen (2005), Zissimopoulos and Karoly (2007), Nykvist (2008), and Fairlie and Krashinsky (2012).
R.P. Ribas
that small entrepreneurs cope with start-up costs and investment risks (Ghatak et al. 2001), which yet represent a large sacrifice for poor individuals (Buera 2009).2 On the other hand, the latent entrepreneurial activity could also be explained by the lack of investment opportunities in underdeveloped areas (Sadoulet et al. 2001; Davies and Davey 2008). Also, informal financial arrangements, such as interpersonal lending (Tsai 2004; Fafchamps and Gubert 2007; Schechter and Yuskavage 2012) and
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