Gotta' Have Money to Make Money? Bargaining Behavior and Financial Need of Microentrepreneurs

Abstract

Bargaining over purchase prices with microenterprise owners in Ghana, we show that poorer microentrepreneurs agree to significantly lower prices than wealthier firm owners. This relationship is robust to controlling for a plethora of observables, including owner fixed effects across two rounds of panel data. A computerized bargaining experiment on the same sample, with randomized initial endowment, corroborates our real-bargaining panel findings. A simple extension of classic bargaining theory to include endowments with Constant Relative Risk Aversion (CRRA) preferences yields a similar prediction. Further exploration of this "need-bargaining'' relationship is a key frontier in understanding barriers to the profitability of microenterprises.