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The Origins of Self-Employment

The Origins of Self-Employment. Some comments Enrique Seira. Environment in B&H: Time trends. War: 75% drop in per-capita GDP from 1990 to 1995, and back again to pre-war level in 2005. In 1996 (self reported) unemployment rate was 80%, and decreased to 35% by 2001.

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The Origins of Self-Employment

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  1. The Origins of Self-Employment Some comments Enrique Seira

  2. Environment in B&H: Time trends • War: • 75% drop in per-capita GDP from 1990 to 1995, and back again to pre-war level in 2005. • In 1996 (self reported) unemployment rate was 80%, and decreased to 35% by 2001. • Informal sector is estimated to be 50% of GDP • After War Policies: • Promotion of self-employment through: micro-credit (2000); bank deregulation (2001); and labor mobility (2000)

  3. Data • LSMS: • Panel 2001-2004. • About 5,400 households. • Definitions: • Self-employed: owner of an enterprise (5%) • Enter self-employment: not SE in 2001 and SE between 2002-2004 (229 individuals enter SE) • Survive: still SE in the following 1-year (about ½ exit)

  4. Some Hypothesis and Empirical Strategy • Entry into self employment and survival facilitated (among others) by: • Access to finance (having a bank loan) • Psychological factors (optimism) • Coming from the informal sector (incubator) • Empirical Strategy: • Compare the characteristics of entrants into self-employment with those that never become self employed in sample period (employed, unemployed, inactive) • Estimate determinants of survival taking into account that “new entrepreneurs” are a selected sample

  5. Some of the Main Results • Having an existing bank “relationship” positively related to survival, although not to entry into self employment • Individuals that become self-employed have: • More wealth (2 s.d. increase= 2%*** more likely to become SE. Recall 5% are SE) • More optimistic (1%***) • More likely to come from informal sector (coeff=0.019*) • More likely to survive if household have: • More wealth (1.6%**) • Bank loan in 2001 (coeff=0.02*) • Come from informal sector (coeff=0.014***)

  6. Advantages and Contributions • Rich set of individual characteristics including: • Psychological factors (Evans and Leighton 1989, Djankov et al 2005) • Relation with financial institutions (Paulson and Townsend 2005) There has been very little work exploring these determinants. • Few studies of entrepreneurship in LDC’s, but presumably tighter financial constraints there. • Are entrepreneurs different in LDC’s? • Analysis of where the entrepreneurs are coming from: • Finding: more likely to come from informal sector.

  7. Some Concerns • Causality: what is driving entry into self employment? • Recall: period of big changes in the economy • How representative? (non-stationary): who has yet to switch and who switched before the sample period? • There is evidence that the characteristics of the entrants to self-employment change during a crisis (Paulson and Townsend 2005). You may be picking a particular selection. • However: no mayor time trends in SE in this sample. • Having a loan in 2001=Access to finance? What do we learn from this coefficient? Not clear: confounding effects: • Maybe this crowds out future loans. Leverage may be associated with higher exit (Zingales 1998) • Access/supply vs. demand of credit? • Financing effect (on it’s own) vs. Selection by bank?

  8. Things I would like to see • Changes in opportunity cost being SE: Include time varying proxies of labor market opportunities (wages in different jobs, general unemployment, etc). • “forced” self-employment? (Fragile histories of employment: Evans and Leighton 1989) Analyzing which industries do the newly self-employed go to, as well as the profit they make could provide useful information. • What type of informal workers are becoming owners: those with other out of employment activity? • Compare entrepreneurs with employed, unemployed and inactive separately.

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