Kinship Taxation as a Constraint to Microenterprise Growth: Experimental Evidence from Kenya

Thursday, 20 October, 2016
Abstract: 
Developing country entrepreneurs face family pressure to share income. This pressure, a kinship tax, can distort capital allocations. Squires (2016) combines evidence from a lab experiment - which allows to estimate an individuallevel sufficient statistic for the distortion - with data collected on a sample of Kenyan entrepreneurs, to quantify the importance of the tax. The data reveal high kinship tax rates for a third of entrepreneurs in the sample. The quantitative analysis makes use of a simple structural model of input allocation fitted to the data, and implies that removing distortions from kinship taxation would increase total factor productivity by 26%, and increase the share of workers in firms with fi ve or more employees from 9% to 56%. These eff ects are substantially larger than those coming from credit market distortions, which the author estimates using a cash transfer RCT. The analysis also implies strong complementarities between kinship taxation and credit constraints.