How much do financial constraints delay entrepreneurship and how much do they cost households in terms of foregone welfare and implied inequality in countries with large informal sectors and poorly developed financial markets? I use a dynamic occupational choice model with credit constraints to...

We explore how financial constraints distort the entry decisions among otherwise productive entrepreneurs and limit growth of promising young firms. A model of liquidity-constrained entrepreneurs suggests that the easing of credit constraints can induce more entry of firms with greater long-run...