Financial constraints, risk taking and firm performance: Recent evidence from microfinance clients in Tanzania

Financial constraints and risk taking are two well-established determinants of firm performance, however, no research analyzes how these variables are connected in the context of a high risk environment. Using data from microfinance clients in Tanzania, we derive a novel financial constraints measure and incorporate a psychometric risk taking scale. Results confirm the importance of access to finance and risk attitudes for business development. Also, we provide preliminary evidence for an interaction between financial constraints and risk taking. Financial constraints “throw sand in the wheels” and protect risk taking entrepreneurs from the negative impact of risk taking on microenterprise performance.
 
Keywords: micro-credit, access to finance, risk attitude, entrepreneurship, Africa.
JEL classification: D22, G29, O16.

Working paper no. 358