Capital market imperfections, uncertainty or both: Evidence on economic constraints to informal enterprises in Sub-Saharan Africa

This paper investigates the patterns of capital entry barriers into informal activities and capital returns in a number of Sub-Saharan African economies using a unique micro data set on informality covering seven West-African countries. Our assessment of initial investment of micro and small enterprises (MSEs) suggests that while few activities seem to exhibit considerable entry barriers, some informal entrepreneurs incur substantial initial investment, in particular when compared to their earnings levels. We find very heterogeneous patterns of capital returns in informal MSEs. At very low levels of capital, marginal returns are high, but rapidly decreasing. In a medium range of capital between 150 and 1 000 international dollars, marginal returns tend to be low and unstable. Only at higher levels of capital, they become more stable and can be fairly high again. These results are partly consistent with a dichotomous informal sector where subsistence activities co?exist with more capital intensive activities.