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Job market paper

Knockin’ on the Bank’s Door: Why is Self-Employment Going Down?

This study examines the decline in the ability to obtain financing as a potential explanation for the observed decrease in U.S. self-employment. The shrinking of the U.S. branch bank network since 2010 and increased average borrower-lender distance decreases the accessibility of the credit institutions for borrowers. To evaluate the impact of the credit market accessibility (CMA) on entry into self-employment, I disaggregate the self-employed into two categories: entrepreneurs whose businesses depend on business loans (Type-1) and other self-employed (Type-2). Using a novel data source (the Community Advantage Panel Survey database), I find that the proximity of credit market institutions has heterogeneous effects on the transition to self-employment. An improvement in CMA increases the likelihood of transition to Type-1 self-employment. But, for Type-2 self-employment, the effect is the opposite: the transition probability to Type-2 self-employment decreases and this type of self-employed more likely switches to paid-employment to be able to receive non-business related loans. Based on the estimates, the paper determines the effect of several improvements in credit market access (e.g., additional branch banks) on the two types of self-employment and paid-employment.

Fields

Labor economics, Development economics, Applied microeconomics

Other papers

Labor Informality and Credit Market Development. with Klara Peter and Jan Svejnar

The Role of Social Networks and Informal Loans in Labor Market Choices.