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Monitoring costs, credit constraints and entrepreneurship

Banerji, Sanjay; Raj, Rajesh S.N.; Sen, Kunal

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Rajesh S.N. Raj

Kunal Sen


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. While 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 which 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.

Journal Article Type Article
Acceptance Date Jun 26, 2015
Online Publication Date Jul 27, 2015
Publication Date Sep 1, 2016
Deposit Date Nov 30, 2016
Publicly Available Date Nov 30, 2016
Journal Manchester School
Print ISSN 1463-6786
Electronic ISSN 1467-9957
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 84
Issue 5
Keywords entrepreneurship, monitoring costs, credit constraint, household enterprises, India.
Public URL
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