Working Paper

2017-06-06

University of Cape Town

Policymakers in developing countries have recognized that productive entrepreneurship can help eliminate extreme poverty. This paper develops a search model of costly entrepreneurial start-ups under a constraining business environment and skill gaps, where one of the equilibrium outcomes is a low-productivity trap. The model reflects stylized facts from the urban labor markets in low income countries such as Ethiopia where low rates of productive entrepreneurship coexist with high output growth in some sectors. Creating an enabling business environment could help move the economy into the high-productivity equilibrium if the regulatory improvements are substantial and other bottlenecks such as skill gaps addressed. We test the role of the business environment in entrepreneurial sales on data from a recent World Bank survey of enterprises in Addis Ababa.

The authors thank Emerta Asaminew and Andreas Wörgötter for comments. Special thanks go also to Zorobabel Bicaba for help with the regression tests. This paper is an updated and substantially expanded version of the IZA Discussion Paper No. 7553 and the William Davidson Institute Working Paper No. 1000. The views expressed are those of the authors and do not necessarily reflect those of the African Development Bank.