The Origins of Self-Employment

Some commentsEnrique 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. 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)

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)

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

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***)

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.

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?

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.