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.
Highlights
There has been a long debate over whether insufficient liquidity hinders individuals from starting their own business
The findings suggest that the proportion of entrepreneurs among less-educated men has grown by 10 percent because of the Bolsa Famılia program, which had covered about 20 percent of households by 2006
In the case of a cash transfer program, the identification of spillovers reveals that its impact goes well beyond cash and conditionalities, uncovering the role of inter-household exchanges within the informal economy
Summary
There has been a long debate over whether insufficient liquidity hinders individuals from starting their own business. While the rise in entrepreneurial activity is entirely driven by spillovers, the direct response of participants reduces the overall effect by 40 percent This drawback seems to be induced by households’ risk of losing the benefit when their earned income increases.. What is usually interpreted as an individual shock, which lessens liquidity constraints, may be a locally aggregate shock, which affects the entire village This misconception explains, for instance, why microcredit programs usually have low take-up, crowd out informal lending, and are not so effective in terms of business creation (Banerjee et al 2015b). The second main contribution of this study relates to the impact of cash transfer programs on incomegenerating activities These programs are only intended to alleviate poverty in the short run and improve children’s opportunities in the long run, they are found to encourage the creation of small enterprises.
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