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Financial Development and Micro-Entrepreneurship

Published online by Cambridge University Press:  26 August 2021

Rajeev Dehejia  and
Nandini Gupta Open the ORCID record for Nandini Gupta [Opens in a new window]
Rajeev Dehejia
Affiliation:
New York University Wagner Graduate School of Public Service [email protected]
Nandini Gupta*
Affiliation:
Indiana University Kelley School of Business
*
[email protected] (corresponding author)
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Abstract

Does financial development facilitate micro-entrepreneurship? Using randomized surveys of over 1 million Indian households and bank-branch location as predetermined by government policy, we find that access to finance shifts workers from informal micro-entrepreneurship into formal employment. Financial access reduces the likelihood of being self-employed but benefits micro-enterprises with employees, as well as formal firms. Using data on 400,000 firms, we find that in districts with more banks, firms have higher loans, productivity, employment, and wages than firms in less banked districts. This evidence suggests a labor-market mechanism by which financial development facilitates growth: by shifting workers from unproductive micro-entrepreneurship into productive employment.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 5 , August 2022 , pp. 1834 - 1861
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We gratefully acknowledge the support of the NSE-NYU Stern Initiative on the Study of Indian Capital Markets. We also thank Viral Acharya, Anusha Chari, Andrew Ellul, Joseph Fan, Todd Gormley, Isaac Hacamo, Rick Harbaugh, Andrew Karolyi, Ajay Mishra, Prachi Mishra, Vikram Nanda, Arvind Panagariya, N. R. Prabhala, Antoinette Schoar, Carsten Sprenger, Gregory Udell, Zhenyu Wang, and seminar and conference participants at Australian National University; the 2016 Symposium on Emerging Financial Markets; the 2016 International Moscow Finance Conference; the 2015 China International Conference in Finance; the 2014 Columbia–Cornell–World Bank Conference on Markets, Labor, and Regulation; George Washington University; Indiana University Kelley School of Business; and the 2015 NSE-NYU Indian Capital Markets Conference for useful comments, as well as Shaheen Lavie-Rouse for outstanding research assistance.

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