Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development

Dean Karlan, Ryan Knight and Christopher Udry
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Ryan Knight: Yale University

Working Papers from Yale University, Department of Economics

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.

JEL-codes: D21 D24 D83 D92 L20 M13 O12 (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-dev, nep-ent and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (72)

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Related works:
Working Paper: Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development (2012)
Working Paper: Hoping to Win, Expected to Lose: Theory and Lessons on Microenterprise Development (2012)
Working Paper: Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development (2012)
Working Paper: Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development (2012)
Working Paper: Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:yaleco:105

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