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Measuring microenterprise profits : don't ask how the sausage is made

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Author Info

  • de Mel, Suresh
  • McKenzie, David
  • Woodruff, Christopher

Abstract

A large share of the world's poor is self-employed. Accurate measurement of profits from microenterprises is therefore critical for studying poverty and inequality, measuring the returns to education, and evaluating the success of microfinance programs. But a myriad of problems plague the measurement of profits. The authors report on a variety of different experiments conducted to better understand the importance of some of these problems and to draw recommendations for collecting profit data. In particular, they (1) examine how far we can reconcile self-reported profits and reports of revenue minus expenses through more detailed questions; (2) examine recall errors in sales and report on the results of experiments which randomly allocated account books to firms; and (3) ask firms how much firms like theirs underreport sales in surveys like this, and have research assistants observe the firms at random times 15-16 times during a month to provide measures for comparison. The authors conclude that firms underreport revenues by about 30 percent, that account diaries have significant effects on both revenues and expenses but not on profits, and that simply asking profits provides a more accurate measure of firm profits than detailed questions on revenues and expenses.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4229.

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Date of creation: 01 May 2007
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Handle: RePEc:wbk:wbrwps:4229

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Keywords: Business in Development; Business Environment; Competitiveness and Competition Policy; Economic Theory&Research; Income;

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References

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  1. Vijverberg, P.M., 1992. "Measuring Income from Family Enterprises with Household Surveys," Papers 84, World Bank - Living Standards Measurement.
  2. Banerjee, Abhijit & Duflo, Esther, 2006. "The Economic Lives of the Poor," CEPR Discussion Papers 5968, C.E.P.R. Discussion Papers.
  3. Lisa Daniels, 2001. "Testing alternative measures of microenterprise profits and net worth," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(5), pages 599-614.
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Citations

Blog mentions

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  1. Tools for evaluators
    by Chris Blattman in Chris Blattman on 2008-10-21 15:21:00
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Cited by:
  1. McKenzie, David & Seynabou Sakho, Yaye, 2010. "Does it pay firms to register for taxes? The impact of formality on firm profitability," Journal of Development Economics, Elsevier, vol. 91(1), pages 15-24, January.
  2. Rafael La Porta & Andrei Shleifer, 2011. "The Unofficial Economy in Africa," NBER Working Papers 16821, National Bureau of Economic Research, Inc.
  3. Guénard, Charlotte & Mesplé-Somps, Sandrine, 2010. "Measuring inequalities: do household surveys paint a realistic picture?," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/5143, Université Paris-Dauphine.
  4. World Bank, 2009. "Gender in Bolivian Production : Reducing Differences in Formality and Productivity of Firms," World Bank Publications, The World Bank, number 2669.
  5. Razafindrakoto, Mireille & Roubaud, François & Torelli, Constance, 2009. "Measuring the informal sector and informal employment: the experience drawn from 1-2-3 surveys in African countries," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/10627, Université Paris-Dauphine.
  6. Blattman, Christopher & Fiala, Nathan & Martinez, Sebastian, 2011. "Employment generation in rural Africa : mid-term results from an experimental evaluation of the Youth Opportunities Program in Northern Uganda," Social Protection Discussion Papers 66523, The World Bank.
  7. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 275-363.
  8. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Are Women More Credit Constrained? Experimental Evidence on Gender and Microenterprise Returns," American Economic Journal: Applied Economics, American Economic Association, vol. 1(3), pages 1-32, July.
  9. Soohyung Lee & Benjamin A. Malin, 2009. "Education's role in China's structural transformation," Finance and Economics Discussion Series 2009-41, Board of Governors of the Federal Reserve System (U.S.).
  10. Bardasi, Elena & Beegle, Kathleen & Dillon, Andrew & Serneels, Pieter, 2010. "Do Labor Statistics Depend on How and to Whom the Questions Are Asked? Results from a Survey Experiment in Tanzania," IZA Discussion Papers 4733, Institute for the Study of Labor (IZA).
  11. Roubaud, François, 2009. "Production of informal sector statistics in Africa: Lessons and perspectives for improvement ?," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/10625, Université Paris-Dauphine.
  12. Razafindrakoto, Mireille & Roubaud, François & Torelli, Constance, 2009. "La mesure de l’emploi et du secteur informels : Leçons des enquêtes 1-2-3 en Afrique," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/10910, Université Paris-Dauphine.
  13. Steinbuks, J., 2008. "Financial constraints and firms' investment: results of a natural experiment measuring firm response to power interruption," Cambridge Working Papers in Economics 0844, Faculty of Economics, University of Cambridge.
  14. Kenyon, Thomas, 2008. "Tax Evasion, Disclosure, and Participation in Financial Markets: Evidence from Brazilian Firms," World Development, Elsevier, vol. 36(11), pages 2512-2525, November.
  15. Roubaud, François, 2009. "La production statistique sur le secteur informel en Afrique : quels enseignements et quelles perspectives ?," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/10921, Université Paris-Dauphine.

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