Credit constraints and investment decisions: the experience of the Brazilian informal sector

Abstract

This paper investigates the existence of credit rationing to informal enterprises in the Brazilian economy. A model of occupational choice developed in Evans and Jovanovic (1989) is adapted to the firm’s investment decision, conditional on its budget constraint. One result of this model is that wealth enhances investment particularly in more credit-constrained firms. This result motivates our empirical strategy that uses the relationship between wealth and investment to identify whether urban informal enterprises are credit constrained. Using data from the “Economia Informal Urbana” survey (ECINF) conducted by IBGE, for the year 2003, we find evidence that wealth has a significant impact on various investment decisions. Furthermore, our estimates suggest that for investments in physical capital, self-employed workers face stronger credit restrictions than employers.