Relative to their counterparts in high-income regions, entrepreneurs in developing countries face less efficient financial markets, more volatile macroeconomic conditions, and higher entry costs. This paper develops a dynamic empirical model that links these features of the business environment to firm ownership patterns, firm size distributions, productivity distributions, borrowing patterns, and cross-household savings behavior. Applied to panel data on Colombian apparel producers, the model yields econometric estimates of a credit market imperfection index, the sunk costs of creating a new business, and various other parameters. It also provides a basis for several counterfactual experiments. These show, inter alia, that an efficient credit market would improve the weighted-average efficiency of producers by about 5 percent, partly by allowing the most productive producers to expand and partly by reducing the incentives for inefficient firms to remain in the market. The gains from better intermediation accrue mainly during periods of macro volatility, and mainly to households with modest wealth but high entrepreneurial ability.
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