Premium
Monitoring Costs, Credit Constraints and Entrepreneurship
Author(s) -
Banerji Sanjay,
Raj Rajesh S. N.,
Sen Kunal
Publication year - 2016
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12122
Subject(s) - constraint (computer aided design) , entrepreneurship , economics , access to finance , labour economics , developing country , finance , business , economic growth , mechanical engineering , engineering
Access to finance is seen as a binding constraint on the growth of household enterprises in developing countries. We develop a principal agent model of a household enterprise and show that limited access to finance and monitoring costs constrain the firm size via both a direct and indirect effect. Although greater access to finance has a positive direct effect on the hiring of paid labour, firms may not choose to expand and use paid labour via an indirect route that operates through the monitoring costs of employing paid workers. We use large nationally representative surveys of household enterprises in Indian manufacturing and find support for the predictions of our theory.