Credit constraints and delayed entrepreneurship

How much do financial constraints delay entrepreneurship and how much do they cost households in terms of foregone welfare in countries with large informal sectors and poorly developed financial markets? This paper uses a standard, partial equilibrium, dynamic model of occupational choice under financial constraints to derive the optimal time that households take to switch from subsistence work to entrepreneurship. Using data from the informal sector in Cameroon, the paper first tests the implications of the model with reduced-form, survival regression models and then structurally estimates key parameters using maximum likelihood. Prospective entrepreneurs would need to work for an average of 7 years as subsisters to accumulate the minimum savings required to start their micro-enterprise. Among the potential entrepreneurs about 53% are subsisters implying a missing proportion of entrepreneurs of 10.9% among which more than 32% have wealth below their estimated poverty traps. This means that despite their talent and ability to save a sizable fraction of the population will never start a profitable firm, given the tight collateral constraints in the economy. Finally, the paper conducts counterfactual simulations based on the estimated model. The results show substantial welfare gains from relaxing credit constraints, accruing mostly to high talent individuals.