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Liquidity, Risk, And Occupational Choices

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Executive Summary

The authors explore which financial constraints matter the most in the choice of becoming an entrepreneur. They consider a randomly assigned welfare program in rural Mexico and show that cash transfers significantly increase entry into entrepreneurship. They then exploit the cross-household variation in the timing of these transfers and find that current occupational choices are significantly more responsive to the transfers expected for the future than to those currently received. Guided by a simple occupational choice model, they argue that the program has promoted entrepreneurship by enhancing the willingness to bear risk as opposed to simply relaxing current liquidity constraints.

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