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Hoping to Win, Expected to Lose: Theory and Lessons on Microenterprise Development

  • Dean Karlan, Ryan Knight, and Christopher Udry

We show how financial and managerial constraints impede experimentation and thus limit learning about the profitability of investments. Imperfect information about one’s own type, but willingness to experiment to learn one’s type, leads to short-run negative expected returns to investments, with some outliers succeeding. We find in an experiment that entrepreneurs invest randomized grants of cash and adopt advice from randomized grants of consulting services, but both lead to lower profits on average. In the long run, they revert back to their prior scale of operations. In a meta-analysis, results from 19 other experiments find mixed support for this theory.

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File URL: http://www.cgdev.org/files/1426733_file_Karlan_Knight_Udry_micro_enterprise.pdf
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Paper provided by Center for Global Development in its series Working Papers with number 312.

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Length: 55 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:cgd:wpaper:312
Contact details of provider: Web page: http://www.cgdev.org

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  1. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2007. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," IZA Discussion Papers 2934, Institute for the Study of Labor (IZA).
  2. Bruhn, Miriam & Karlan, Dean S. & Schoar, Antoinette S, 2012. "The Impact of Consulting Services on Small and Medium Enterprises: Evidence from a Randomized Trial in Mexico," CEPR Discussion Papers 8887, C.E.P.R. Discussion Papers.
  3. Yukichi Mano & Alhassan Iddrisu & Yutaka Yoshino & Tetsushi Sonobe, 2011. "How Can Micro and Small Enterprises in Sub-Saharan Africa Become More Productive? The Impacts of Experimental Basic Managerial Training," GRIPS Discussion Papers 11-06, National Graduate Institute for Policy Studies.
  4. Christopher Udry & Santosh Anagol, 2006. "The Return to Capital in Ghana," American Economic Review, American Economic Association, vol. 96(2), pages 388-393, May.
  5. Marcel Fafchamps & David McKenzie & Simon Quinn & Christopher Woodruff, 2011. "When is capital enough to get female microenterprises growing? Evidence from a randomized experiment in Ghana," CSAE Working Paper Series 2011-11, Centre for the Study of African Economies, University of Oxford.
  6. Nicholas Bloom & Benn Eifert & Aprajit Mahajan & David McKenzie & John Roberts, 2013. "Does Management Matter? Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 128(1), pages 1-51.
  7. Dean Karlan & Martin Valdivia, 2007. "Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions," Working Papers 107, Center for Global Development.
  8. Bruhn, Miriam & Zia, Bilal, 2011. "Stimulating managerial capital in emerging markets : the impact of business and financial literacy for young entrepreneurs," Policy Research Working Paper Series 5642, The World Bank.
  9. Gabriela Calderón & Jesse M.Cunha ; & Giacomo De Giorgi , 2013. "Business Literacy and Development: Evidence from a Randomized Controlled Trial in Rural Mexico," Working Papers 2013-24, Banco de México.
  10. Tetsushi Sonobe & Aya Suzuki & Keijiro Otsuka & Vu Hoang Nam, 2012. "KAIZEN for Managerial Skills Improvement in Small and Medium Enterprises: An Impact Evaluation Study in a knitwear cluster in Vietnam," Working Papers 29, Development and Policies Research Center (DEPOCEN), Vietnam.
  11. Karlan, Dean & Osei-Akoto, Isaac & Osei, Robert Darko & Udry, Christopher, 2012. "Agricultural Decisions after Relaxing Credit and Risk Constraints," Working Papers 110, Yale University, Department of Economics.
  12. Attanasio, Orazio & Augsburg, Britta & De Haas, Ralph & Fitzsimons, Emla & Harmgart, Heike, 2011. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," MPRA Paper 35439, University Library of Munich, Germany.
  13. Shawn Cole & Thomas Sampson & Bilal Zia, 2011. "Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?," Journal of Finance, American Finance Association, vol. 66(6), pages 1933-1967, December.
  14. Britta Augsburg & Ralph De Haas & Heike Harmgart & Costas Meghir, 2012. "Microfinance at the margin: Experimental evidence from Bosnia and Herzegovina," IFS Working Papers W12/15, Institute for Fiscal Studies.
  15. Esther Duflo & Michael Kremer & Jonathan Robinson, 2011. "Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya," American Economic Review, American Economic Association, vol. 101(6), pages 2350-90, October.
  16. de Mel, Suresh & McKenzie, David J. & Woodruff, Christopher, 2009. "Measuring microenterprise profits: Must we ask how the sausage is made?," Journal of Development Economics, Elsevier, vol. 88(1), pages 19-31, January.
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