The Smoothing Value of Microenterprise: Evidence from Coffee Price Shocks in Tanzania

Studies of entrepreneurship in the developing world have largely focused on understand­ ing barriers to the expansion of existing microenterprises. Using data from a unique panel of coffee-farming households in Tanzania, we show that intermittent, low-capital entrepreneurial activity in fact plays an important, and hitherto ignored, role as a smooth­ ing mechanism in response to shocks to agricultural revenues, the primary source of in­ come for many households in this context. We first verify that negative shocks to the global coffee price significantly decrease farmgate coffee prices, quantities sold, farm rev­ enues and, consequently, household expenditures on food and non-food items. We then show that entrepreneurial entry and time spent in self-enterprise and off-farm employ­ ment move counter-cyclically with the global coffee price. Our results suggest that even in the absence of financial market failures, “subsistence” microenterprise may exist in equilibrium due to its value as a smoothing mechanism. ∗Preliminary draft; comments are most welcome. †Yale University; e-mail: [email protected]; web: http://www.yale.edu/adhvaryu ‡Yale University; e-mail: [email protected] §Yale University; e-mail: [email protected]; web: http://nyshadham.squarespace.com