This study analyzes a decline in the ability to obtain financing as a potential explanation for the observed decrease in the U.S. self-employment. The shrinking of the U.S. bank branch network since 2010 and the increased average borrower-lender distance reduce the accessibility of credit institutions for borrowers. To evaluate the impact of the CMA on entry into self-employment, I disaggregate the self-employed into two categories: entrepreneurs whose businesses depend on business loans (incorporated self-employed) and other self-employed (unincorporated self-employed). Using a novel data source (the Community Advantage Panel Survey database), I find that the proximity of credit market institutions has heterogeneous effects on transition to self-employment. An improvement in the CMA increases the likelihood of transition to incorporated self-employment. But for the unincorporated self-employed, the effect is the opposite: the probability of transition to unincorporated self-employment decreases and workers of this type are more likely to switch to paid employment to be able to receive non-business related loans. The paper discusses the implications of these results for different policies.
How informal lending institutions affect entrepreneurship? The paper investigates the role of formal and informal credit market institutions in the decision to become an entrepreneur over the life cycle. We develop a dynamic Roy model in which a decision to become an entrepreneur depends on the access to formal and informal credit markets, non-pecuniary benefits of entrepreneurship, career-specific entry costs, prior work experience, education, unobserved abilities, and other labor market opportunities (salaried employment and non-employment). We estimate a model using detailed Russian microdata, which allows us to track individuals’ characteristics and labor market decisions over time, as well as the accessibility of formal and informal credit market institutions. By estimating a structural model of labor market decisions and borrowing options, we assess the welfare impact of the development of informal and formal credit institutions. The development of formal credit market institutions positively impacts all workers' categories, reduces the share of entrepreneurs who borrow from informal sources, and incentivized low-type entrepreneurs to switch to salaried employment. The development of the informal credit market reduces the percentage of high-type entrepreneurs who borrow from formal sources. A higher value of the social network, or higher costs of losing social ties in the case of default, demotivates low-type entrepreneurs to borrow from informal sources. Thus, this paper delivers a nuanced characterization of the winners and losers of the development of the formal and informal credit market institutions and provides a framework for understanding the consequences of different credit market regulations. Also, we highlight the practical implications of our estimates by evaluating policies design to promote entrepreneurship, such as subsidies, as well as the accessibility regulations in credit market institutions.
The paper investigates the effects of the credit market development on the labor mobility between the informal and formal labor sectors. In the case of Russia, due to the absence of a credit score system, a formal lender may set a credit limit based on the verified amount of income. To get a loan, an informal worker must first formalize his or her income (switch to a formal job), and then apply for a loan. To show this mechanism, the RLMS data was utilized, and the empirical method is the dynamic multinomial logit model of employment. The empirical results show that a relaxation of credit constraints increases the probability of transition from an informal to a formal job, and improved credit market accessibility (CMA) by one standard deviation increases the chances of informal sector workers to formalize by 5.4 ppt. These results are robust in different specifications of the model. Policy simulations show strong support for a reduction in informal employment in response to better CMA in credit-constrained communities.
Work in Progress
Mobile Money and Labor Informality in Sub-Saharian Africa
Vocational Education Training and Entrepreneurship with Chu Zou
Peer-to-peer lending during COVID-19 with Lucas A. Mariani and Alex Weng
Winners from Corporate R&D: Labor Mobility and Firms Strategies