| By: |
Woodruff, Christopher;
McKenzie, David;
de Mel, Suresh |
| Abstract: |
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. The
authors use a randomized experiment to overcome this problem and to measure
the return to capital for the average microenterprise in their sample,
regardless of whether they apply for credit. They 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, the authors find the
average real return to capital to be 5.7 percent a month, substantially higher
than the market interest rate. They 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 var y with entrepreneurial ability and with measures of other sources
of cash within the household, but not to vary with risk aversion or
uncertainty. |
| Keywords: |
Economic Theory & Research,Investment and Investment Climate,Microfinance,Small Scale Enterprise,Economic Growth |
| Date: |
2007–05–01 |
| URL: |
http://d.repec.org/n?u=RePEc:wbk:wbrwps:4230&r=mfd |