Returns to Capital in Microenterprises: Evidence from a Field Experiment
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.
|Date of creation:||Jul 2007|
|Publication status:||published in: Quarterly Journal of Economics, 2008, 123 (4), 1329-1372|
|Contact details of provider:|| Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany|
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Banerjee, Abhijit V & Newman, Andrew F, 1993.
"Occupational Choice and the Process of Development,"
Journal of Political Economy,
University of Chicago Press, vol. 101(2), pages 274-298, April.
- Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- Duflo, Esther & Glennerster, Rachel & Kremer, Michael, 2008.
"Using Randomization in Development Economics Research: A Toolkit,"
Handbook of Development Economics,
- Esther Duflo & Rachel Glennerster & Michael Kremer, 2006. "Using Randomization in Development Economics Research: A Toolkit," CID Working Papers 138, Center for International Development at Harvard University.
- Duflo, Esther & Glennerster, Rachel & Kremer, Michael, 2007. "Using Randomization in Development Economics Research: A Toolkit," CEPR Discussion Papers 6059, C.E.P.R. Discussion Papers.
- Esther Duflo & Rachel Glennerster & Michael Kremer, 2006. "Using Randomization in Development Economics Research: A Toolkit," NBER Technical Working Papers 0333, National Bureau of Economic Research, Inc.
- Philippe Aghion & Patrick Bolton, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 151-172.
- 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.
- Lybbert, Travis J. & Barrett, Christopher B. & McPeak, John G. & Luseno, Winnie K., 2007. "Bayesian Herders: Updating of Rainfall Beliefs in Response to External Forecasts," World Development, Elsevier, vol. 35(3), pages 480-497, March.
- Filmer, Deon*Pritchett, Lant, 1998. "Estimating wealth effects without expenditure data - or tears : with an application to educational enrollments in states of India," Policy Research Working Paper Series 1994, The World Bank.
- 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, January.
- 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.
- Banerjee, Abhijit V. & Duflo, Esther, 2005. "Growth Theory through the Lens of Development Economics," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 7, pages 473-552 Elsevier.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp2934. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.