Data Management

Liquidity, Risk And Occupational Choices

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Executive Summary

The authors explore whether financial constraints matter and which financial constraints matter the most in the choice of becoming an entrepreneur. They exploit a randomly assigned welfare program in rural Mexico to show that cash transfers significantly increase entry into entrepreneurship, thereby providing evidence of financial constraints. They then develop a simple model to highlight how liquidity and insurance constraints respond differently to the time pro le of expected cash transfers. Exploiting the cross-households variation in the timing of these transfers, they find that current occupational choices are significantly more responsive to the amount of transfers expected for the future than to the amount of transfers currently received.

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