Faculty Publications

Effects Of Credit And Labor Constraints On Microenterprises And The Unintended Impact Of Changes In Household Endowments: Use Of Threshold Estimation To Detect Heterogeneity

Document Type

Article

Keywords

Credit and labor constraints, Household heterogeneity, Microenterprise development, Threshold estimation, Workfare program

Journal/Book/Conference Title

Quarterly Review of Economics and Finance

Volume

88

First Page

21

Last Page

38

Abstract

Household labor and household credit are strong proxies for constraints faced by household operated microenterprises. Threshold estimation uncovers heterogeneity of these household factor-endowment effects in determining the existence of rural households’ microenterprise initiatives. Our paper finds that for low-income households, the labor constraints are weaker and the capital constraints are stronger compared to the relatively wealthier households. We also examine a comparative static effect of tighter labor constraints and simultaneous relaxed financial constraints using a natural experiment of a government workfare program. The results indicate that every additional day spent by a household in the workfare program significantly reduced the probability of the household to engage in microenterprise. However, the microenterprises for the poorer households experienced a smaller negative effect as predicted, based on higher prevalence of disguised unemployment and stronger benefits of additional credit for the low-income households. Alternate estimation techniques and robustness checks support the results.

Department

Department of Economics

Original Publication Date

4-1-2023

DOI of published version

10.1016/j.qref.2022.12.008

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