| Abstract: |
Many basic economic theories with perfectly functioning markets do not predict
the existence of the vast number of microenterprises readily observed across
the world. We put forward a model that illuminates why financial and
managerial capital constraints may impede experimentation, and thus limit
learning about the profitability of alternative firm sizes. The model shows
how lack of information about one’s own type, but willingness to experiment to
learn one’s type, may lead to short-run negative expected returns to
investments on average, with some outliers succeeding. To test the model we
put forward first a motivating experiment from Ghana, and second a small
meta-analysis of other experiments. In the Ghana experiment, we provide inputs
to microenterprises, specifically financial capital (a cash grant) and
managerial capital (consulting services), to catalyze adoption of investments
and practices aimed towards enterprise growth. We find that entrepreneurs
invest the cash, and take the advice, but both lead to lower profits on
average. In the long run, they revert back to their prior scale of operations.
The small meta analysis includes results from 18 other experiments in which
either capital or managerial capital were relaxed, and find mixed support for
this theory. |