Working Paper: NBER ID: w14116
Authors: Eric Bond; James R. Tybout; Hle Utar
Abstract: Relative to their counterparts in high-income regions, entrepreneurs in developing countries face less efficient financial markets, more volatile macroeconomic conditions, and higher entry costs. This paper develops a dynamic empirical model that links these features of the business environment to cross-firm productivity distributions, entrepreneurs' welfare, and patterns of industrial evolution. Applied to panel data on Colombian apparel producers, the model yields econometric estimates of a credit market imperfection index, the sunk costs of creating a new business, and a risk aversion index (inter alia). Model-based counterfactual experiments suggest that improved intermediation could dramatically increase the return on assets for entrepreneurial households with modest wealth, and that the gains are particularly large when the macro environment is relatively volatile.
Keywords: Credit Rationing; Risk Aversion; Industrial Evolution; Developing Countries
JEL Codes: D24; L26; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credit market imperfections (E44) | Entrepreneurial investment (L26) |
| Elimination of credit market imperfections (D53) | Returns on asset portfolios for entrepreneurial households (G59) |
| Volatile macroeconomic environments (E32) | Costs of credit market imperfections (G19) |
| Reduction in spread between borrowing and lending rates (E43) | Shift in wealth portfolios (G11) |