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. 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 vary with entrepreneurial ability and with measures of other sources of cash within the household, but not to vary with risk aversion or uncertainty.
| Main Authors: | , , |
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| Language: | English |
| Published: |
World Bank, Washington, DC
2007-05
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| Subjects: | AGRICULTURE, ASSETS, CAPITAL INVESTMENT, CAPITAL STOCK, CONSUMERS, CREDIT MARKETS, DEVELOPMENT ECONOMICS, EMPLOYMENT, ENTREPRENEURS, EXPANSION, EXPENDITURES, FIRM SIZE, FIRMS, INCOME, INCOME LEVELS, INCOME TAXES, INCREASE IN LABOR, INCREASING RETURNS, INTEREST RATE, INTEREST RATES, INVENTORIES, LABOR FORCE, LEVEL OF CAPITAL, LEVEL OF PROFITS, LEVELS OF CAPITAL, LOTTERY, MARGINAL RETURN TO CAPITAL, MICROENTERPRISES, MICROFINANCE, MICROFINANCE ORGANIZATIONS, PRODUCTION FUNCTION, PROFITABILITY, RETURN TO CAPITAL, RISK AVERSION, SMALL ENTERPRISES, SMALL FIRMS, STORES, SUPPLIERS, WAGES, Microdata Set, |
| Online Access: | http://documents.worldbank.org/curated/en/2007/05/7585337/returns-capital-microenterprises-evidence-field-experiment https://hdl.handle.net/10986/7124 |
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| Summary: | 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 vary with entrepreneurial ability and
with measures of other sources of cash within the household,
but not to vary with risk aversion or uncertainty. |
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