SMU SOE Seminar (Apr 26, 2017): Involuntary Entrepreneurship – Evidence from Thai Urban Data

We structurally estimate a model of occupational choice between entrepreneurial and non-entrepreneurial alternatives. Unlike much of the existing literature, we explicitly model and distinguish between “involuntary” entrepreneurship, that is, running an own business out of necessity vs. running an own business by choice. Involuntary entrepreneurship arises for agents who prefer (would earn higher income in) the non-entrepreneurial occupation (e.g., wage work) but cannot access it, with some probability that we estimate, due to low education, qualifications or labor market frictions. We also incorporate a credit constraint and analyze its interaction with the labor market constraint. We estimate the model via GMM using the 2005 Townsend Thai urban survey. We find that approximately 17% of all households running businesses are classified as involuntary entrepreneurs. Involuntary entrepreneurs earn lower income and are more likely among low-wealth and low-schooling households. We use the estimated model to quantify and distinguish the misallocations in occupational choice and investment from the credit and labor market constraints. We also evaluate the effects of relaxing the constraints and the impact of a microfinance policy on the rate of total and involuntary entrepreneurship and on household income, on average and stratified by wealth and schooling. The results suggest large potential income gains, especially for poorer households. Relaxing the credit constraint mostly alleviates misallocations in investment, while the misallocation from involuntary entrepreneurship is only significantly reduced by addressing the labor market constraint.

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