Entrepreneurship and Financial Constraints:

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Entrepreneurship and Financial Constraints The
Case of Nicaragua Luis Tejerina
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• Objective
• This specific study is intended to explore the
  behavior of entrepreneurs with respect to
  financial markets and to test for the existence
  and types of constraints faced by potential
  entrepreneurs.
• The paper also intends to underline the need and
  usefulness of gathering detailed financial
  information in household surveys to monitor the
  level of development of financial markets in LAC.
• One of the benefits of this type of data is that
  one is able to take a look at potential
  entrepreneurs and try to discern the constraints
  that keep them out of entrepreneurship.

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• Why Nicaragua?
• Nicaragua was chosen for the study based on the
  detail of the financial information included in
  the 1998 Living Standards Measurement survey.

• Also Nicaragua experienced in the period under
  study a spell of stable though moderate growth
  (1.8 in per capita terms ) and increasing
  inequality (Gini from .57 to .60). Any models of
  this type are set under similar characteristics.

Nicaragua
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Why Entrepreneurship?

• The development and understanding of
  entrepreneurship has been recognized as a key
  area for economic development, an environment
  that welcomes new enterprises is fundamental for
  developing countries (Stern 2001).
• In Nicaragua small enterprises are an important
  employment creator some studies put the
  percentage of workers employed in enterprises
  with less than 5 workers as high as 67.

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• Urban Vs. Rural?
• In a recent survey Shane (2003) also presents
  evidence from studies in economics and other
  fields that find that urban areas present better
  opportunities and positive externalities like
  more access to role models and chance to spin-off
  from bigger companies, one possibility is that
  these factors can be substitutes for formal
  education (e.g. learning to keep books by
  observing the business next door, or learn the
  skills as an employee and then create a separate
  business).

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How do entrepreneurs differ from non
entrepreneurs with relationship to the financial
sector?
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What are the most frequent impediments to get
credit?
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Sample

• This study follows the lines of an extensive
  literature studying the relationship between
  wealth and entry into entrepreneurship.
• To avoid endogeneity problems (owning a business
  increases wealth and more wealth increases the
  probability of owning a business) the wealth
  variable used is the retrospective wealth for 5
  years ago.
• In order to study only entrants into
  entrepreneurship, all the households that had a
  business for more than 5 years.
• The sample is only composed of households who
  either dont have a business or started their
  first business in the previous five years.
  Business owner who opened their second or third
  businesses within the relevant period where also
  omitted.

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Entrepreneurship and Wealth
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Entrepreneurship and Wealth
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Entrepreneurship and Wealth
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Entrepreneurship and Education
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Entrepreneurship and Education
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Entrepreneurship and Education
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Evans Jovanovic (1989) Agents choose between
wage or self employment, agents differ in wealth
and entrepreneurial talent, can only borrow a
proportion of their wealth, if talent or wealth
too low will preffer wage employment, if talent
too high will be entrepreneurs but may be
constrained.
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Aghion Bolton (1997) Moral hazzard problem,
low wealth people will be constrained since they
cannot guarantee the expected return required by
the market ( they need to borrow too much, which
hurts their incentives to put effort in their
projects). Market failures increase cost of
capital for low wealth entrepreneurs, and make
the probability of success rise faster with
wealth, while the first best probability of
success for investors is constant. A permanent
progressive redistribution policy increases
efficiency.
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Identifying the type of constraint
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Policy implications based on the moral hazard
model Policies that are consistent with the
moral hazard model will be those that help to
overcome the problem the bank has to verify the
effort exerted by the borrower in his
project. Policies of this type may be the
extension of joint liability groups to other
areas and institutions or perhaps the
implementation of credit bureaus. Policy
implications based on the limited commitment
model Land titling, eliminating restrictions on
the use of some types of collateral.
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Conclusion Overall education, seems to be an
important determinant of entrepreneurship in
rural areas, and wealth seems to be the
determinant factor in urban areas, older heads of
household. Education programs, especially at the
secondary level seem to be important in the rural
areas for the creation of enterprises, the reason
could be that they enable the head of the
household to interact with financial markets that
cater to the poor.