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Constrained firms, not subsistence activities: Evidence on capital returns and accumulation in Peruvian microenterprises

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  • Dodlova, Marina
  • Göbel, Kristin
  • Grimm, Michael
  • Lay, Jann

Abstract

We present a multi-period model of capital accumulation in order to investigate microenterprise (ME) production dynamics in a developing country context characterized by credit constraints and risk. These constraints are reflected in marginal returns to capital above market interest rates and we show that capital accumulation is faster in MEs with higher productivity, higher initial wealth and less risk exposure. We test our predictions using panel data for Peruvian MEs from 2002 to 2006. We indeed find high marginal returns to capital and sizable effects of household non-business wealth and, in contrast to previous studies, risk on capital accumulation in MEs. The findings of this paper can serve as a basis for the promotion of combined credit and risk management devices to enhance private sector development.

Suggested Citation

  • Dodlova, Marina & Göbel, Kristin & Grimm, Michael & Lay, Jann, 2015. "Constrained firms, not subsistence activities: Evidence on capital returns and accumulation in Peruvian microenterprises," Labour Economics, Elsevier, vol. 33(C), pages 94-110.
    • Handle: RePEc:eee:labeco:v:33:y:2015:i:c:p:94-110
    DOI: 10.1016/j.labeco.2015.01.006
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    2. Renate Strobl & Conny Wunsch, 2021. "Risky choices and solidarity: disentangling different behavioural channels," Experimental Economics, Springer;Economic Science Association, vol. 24(4), pages 1185-1214, December.
    3. Esther Gehrke & Michael Grimm, 2018. "Do Cows Have Negative Returns? The Evidence Revisited," Economic Development and Cultural Change, University of Chicago Press, vol. 66(4), pages 673-707.
    4. Strobl, Renate & Wunsch, Conny, 2017. "Does Voluntary Risk Taking Affect Solidarity? Experimental Evidence from Kenya," IZA Discussion Papers 10906, Institute of Labor Economics (IZA).
    5. Negrete Garcia, Ana Karen, 2018. "Constrained Potential: A Characterisation of Mexican Microenterprises," GIGA Working Papers 309, GIGA German Institute of Global and Area Studies.
    6. Diao, Xinshen & McMillan, Margaret, 2018. "Toward an Understanding of Economic Growth in Africa: A Reinterpretation of the Lewis Model," World Development, Elsevier, vol. 109(C), pages 511-522.
    7. Brei, Michael & Gadanecz, Blaise & Mehrotra, Aaron, 2020. "SME lending and banking system stability: Some mechanisms at work," Emerging Markets Review, Elsevier, vol. 43(C).
    8. Helke Seitz, 2017. "Microenterprises in Developing Countries: Is there Growth Potential?," DIW Roundup: Politik im Fokus 114, DIW Berlin, German Institute for Economic Research.
    9. Esa A. Asyahid & Elan Satriawan, 2024. "The Nature of Self-Employment in Indonesia: Entrepreneurship or Survival Strategy?," Gadjah Mada Economics Working Paper Series 202403002, Department of Economics, Faculty of Economics and Business, Universitas Gadjah Mada.

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    More about this item

    Keywords

    Microenterprises; Capital accumulation; Credit constraints; Risk; Firm growth; Peru;
    All these keywords.

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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