Entrepreneurship during an Economic Crisis: Evidence from Rural Thailand

I analyze entrepreneurship among rural households in Thailand during the 1997 Asian crisis, when the rate of business ownership increased from 17% to 37% within a period of 1 year. I argue that this large increase can be explained by a negative shock to the labor market and structurally estimate this outside-option shock using an occupational choice model. I first show that starting a business is a useful coping strategy for households that endogenously started a business during the crisis—the decrease in their average income is only 10% compared to 17% if their occupations remained exogenously fixed as nonbusiness. Second, I show that low entrepreneurial productivity limits the extent to which improving access to credit for business investment can help with similar self-insurance. These results are consistent with the prevalence of low-productivity self-employment in developing countries and highlight the need for policies that improve productivity and wage market options.