Financial Frictions and the Delay to Entry

Type Working Paper
Title Financial Frictions and the Delay to Entry
Author(s)
Publication (Day/Month/Year) 2015
URL http://www2.gsu.edu/~econpn/Pierre_Nguimkeu/RESEARCH_files/delay_v1.pdf
Abstract
I use a tractable dynamic model of occupational choice to show that the existence of financial constraints to the creation of businesses implies a delay to entry into entrepreneurship, which has both individual and aggregate consequences on inequality and welfare. Talented individuals with low collateral would need to work for several years as wage-earners to accumulate enough savings required to start their own firm. Hence, by the time they become entrepreneurs, they are older than they would in a perfect credit market economy. Data from Cameroon are used to study the qualitative and quantitative predictions of the dynamic model. The results show that it takes on average 7 years for a prospective entrepreneur to accumulate enough wealth required to start his own firm. The related inequality and welfare losses are also found to be substantial, averaging 16% Gini and 10% of lifetime consumption, respectively. An empirical test of the model’s predictions is performed by providing a cross-country evidence that low levels of financial development are associated with large age gaps between entrepreneurs and wage-earners, a pattern often found in empirical studies of entrepreneurial choice in developing countries.

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