What determines self-employment profits Evidence from India

Abstract

The present paper contributes to the limited literature on the factors affecting self-employment performance in the developing country context of India. The study uses the India Human Development Survey (IHDS) panel data for the years 2004-2005 and 2011-2012. The study employs ordinary least squares (OLS) regression to analyse the determinants of profitability, making efforts to correct for potential endogeneity and selection bias in the earnings function. Attempts to correct for endogeneity are made using the instrumental variables method as well as using lag values of potentially endogenous variables in the earnings model. The findings point towards a significant influence of role models, capital constraints, human capital and the market environment on firm performance. However, social networks are not found to influence firm profitability significantly. Further, earnings are found to be significantly lower for female-headed firms and firms owned by socially-marginalised groups.