(i) Training increasing skills: the 4-day business plan training, and the short “school for
start-ups” and online materials provided may increase the entrepreneurial skills of the
owner. Assuming these are complementary with other inputs, we should have dK
*
/dE>0
and dL
*
/dE>0 so that both capital and labor increase.
(ii) Networks increase productivity or entrepreneurial skills: participating in the program
may cause the firm owners to meet other successful business owners. This could
increase their own productivity and skills if they learn from these owners, or can use
these networks to obtain better business deals.
(iii) Improvements in confidence and attitudes: entrepreneurial self-confidence could
directly impact on productivity, or the program, by declaring the owner a winner, may
spur their self-belief in the business and cause them to work harder. In addition, the
signal provided by winning the competition could cause firm owners who are uncertain
about their entrepreneurial type to update their priors and thus change their output
levels if they underinvest because they are unsure of whether they have the skills to
make it at a larger scale.
(iv) Mentoring increases A and E. The YouWIN program in principle provides some basic
mentoring services, which could increase A and E.
(v) Reputation effects: A could increase if winning the competition increases the
businesses’ reputation, signaling quality to customers and therefore allowing it to gain
more customers.
(vi) Formalization effects: the program requires firms to be formal to receive the award. If
firms are rationally informal, formalizing will have no effect, but if information barriers
or other constraints stop firms from formalizing, formalizing may make the firms more
productive.
(vii) Change in the interaction with government: winning the competition could give the firm
some protection against government officials asking for bribes or otherwise inhibiting
firm productivity, since now the firm is seen as a favored firm which shouldn’t be
touched; or conversely winning the competition may make the firm be targeted by rent-
seeking officials therefore reducing productivity.
(viii) Changes in family demands: winning the competition may cause the firm owner be
targeted for more requests for money and or free goods by extended family members.
This could lower firm productivity, or conversely cause the firm owner to invest more in
the firm if money in the firm is less subject to capture than money held at home.
Case 4: YouWIN program with capital and labor market constraints
If firms are credit-constrained, than they invest less in their firms than optimal according to (2).
Winning the YouWIN program could reduce credit constraints in three ways:
(i) Directly by providing a grant to the firm
(ii) Indirectly, through providing a signal of quality that leads to more bank lending
(iii) Indirectly, through providing co-financing and a signal of quality that leads to more
outside investments from partners.
The impact of these channels will be to increase capital stock. This may increase or decrease
labor depending on the shape of the production function – a heavily credit-constrained firm may