Liquidity, Risk, and Occupational Choices.

Abstract

We explore which financial constraints matter the most in the choice of becoming an entrepreneur. We consider a randomly assigned welfare program in rural Mexico and show that cash transfers signi cantly increase entry into entrepreneurship. We then exploit the cross-household variation in the timing of these transfers and nd that current occupational choices are signi cantly more responsive to the transfers expected for the future than to those currently received. Guided by a simple occu- pational choice model, we argue that the program has promoted entrepreneurship by enhancing the willingness to bear risk as opposed to simply relaxing current liquidity constraints.insurance; entrepreneurship; Financial constraints; liquidity;