ABSTRACT

Developing country entrepreneurs face family pressure to share income. This pressure, a kinship tax, potentially distorts capital allocations. I combine evidence from a lab experiment -- which allows me to estimate an individual-level sufficient statistic for the distortion -- with data I collected on a sample of Kenyan entrepreneurs, to quantify the importance of the tax. My data reveal high kinship tax rates for a quarter of participants. My quantitative analysis makes use of a simple model of input allocation fitted to my data, and implies that removing distortions from kinship taxation would increase aggregate productivity by 26%, and increase the share of workers in firms with 5 or more employees from 9% to 56%. These effects are substantially larger than those coming from credit market distortions, which I estimate using a cash transfer RCT. My analysis also implies strong complementarities between kinship taxation and credit constraints.