Can Microfinance Unlock a Poverty Trap for Some Entrepreneurs?

Can microcredit help unlock a poverty trap for some people by putting their businesses on a different trajectory? In Hyderabad, India, where microfinance was found to have very little short-run impact on the average business, we find that “gung ho entrepreneurs” (GEs), households who were already running a business before microfinance entered, show persistent benefits that increase over time. Six years later, the treated GEs own businesses that have 35% more assets and generate double the revenues as comparable households in control neighborhoods. They also borrow substantially more from other (non-microfinance) sources. We find almost no effects on non-GE households. A model of technology choice in which talented entrepreneurs can access either a diminishing-returns technology, or a more productive technology with a fixed cost, generates dynamics matching the data. These results show that heterogeneity in entrepreneurial ability is important and persistent. For talented but low-wealth entrepreneurs, short-term access to credit can indeed facilitate escape from a poverty trap.