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Returns to Capital in Microenterprises: Evidence from a Field Experiment

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Author Info

  • de Mel, Suresh

    ()
    (University of Peradeniya)

  • McKenzie, David

    ()
    (World Bank)

  • Woodruff, Christopher

    ()
    (University of Warwick)

Abstract

Small and informal firms account for a large share of employment in developing countries. The rapid expansion of microfinance services is based on the belief that these firms have productive investment opportunities and can enjoy high returns to capital if given the opportunity. However, measuring the return to capital is complicated by unobserved factors such as entrepreneurial ability and demand shocks, which are likely to be correlated with capital stock. We use a randomized experiment to overcome this problem, and to measure the return to capital for the average microenterprise in our sample, regardless of whether or not they apply for credit. We accomplish this by providing cash and equipment grants to small firms in Sri Lanka, and measuring the increase in profits arising from this exogenous (positive) shock to capital stock. After controlling for possible spillover effects, we find the average real return to capital to be 5.7 percent per month, substantially higher than the market interest rate. We then examine the heterogeneity of treatment effects to explore whether missing credit markets or missing insurance markets are the most likely cause of the high returns. Returns are found to vary with entrepreneurial ability and with measures of other sources of cash within the household, but not to vary with risk aversion or uncertainty.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2934.

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Length: 39 pages
Date of creation: Jul 2007
Date of revision:
Publication status: published in: Quarterly Journal of Economics, 2008, 123 (4), 1329-1372
Handle: RePEc:iza:izadps:dp2934

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Keywords: microenterprises; returns to capital; self-employment;

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References

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  1. Banerjee, Abhijit & Duflo, Esther, 2004. "Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program," CEPR Discussion Papers 4681, C.E.P.R. Discussion Papers.
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  5. Edward Miguel & Michael Kremer, 2004. "Worms: Identifying Impacts on Education and Health in the Presence of Treatment Externalities," Econometrica, Econometric Society, vol. 72(1), pages 159-217, 01.
  6. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 151-72, April.
  7. David S. Lee, 2005. "Training, Wages, and Sample Selection: Estimating Sharp Bounds on Treatment Effects," NBER Working Papers 11721, National Bureau of Economic Research, Inc.
  8. Simeon Djankov & Edward Miguel & Yingyi Qian & Gérard Roland & Ekaterina Zhuravskaya, 2005. "Who are Russia's Entrepreneurs?," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 587-597, 04/05.
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  10. John Gibson & David McKenzie, 2007. "Using the Global Positioning System (GPS) in Household Surveys For Better Economics and Better Policy," Working Papers in Economics 07/04, University of Waikato, Department of Economics.
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  1. The new must-read paper for field experimenters
    by Chris Blattman in Chris Blattman on 2010-12-21 02:07:32
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