EconPapers    
Economics at your fingertips  
 

MICROEQUITY FOR MICROENTERPRISES: EVIDENCE FROM AN ARTEFACTUAL FIELD EXPERIMENT AND SURVEY

Muhammad Meki ()
Additional contact information
Muhammad Meki: Post-doctoral research fellow in development economics at Pembroke College, University of Oxford

No 1348, Working Papers from Economic Research Forum

Abstract: Access to finance is often listed as one of the most important constraints on the expansion of small firms in low-income countries. However, several recent studies reveal that most microcredit-funded businesses rarely grow beyond subsistence-level entrepreneurship. Other evidence shows that cash and capital grants have delivered high returns to some microenterprises, and that small changes to contract structure can have a long-term effect on investment and profits. In this paper, I investigate the potential of ‘microequity’ contracts, which can be viewed as lying at some point on a spectrum between credit and grants, and provide a more flexible form of capital with performance-contingent repayments and a greater sharing of risk and reward. I present results from work with two of the largest microfinance institutions in Pakistan to investigate the effects of microequity contracts on microenterprises. In the first part of the paper, I describe an artefactual field experiment, designed using a simple model of investment choice under different financial contracts. This is tested with microenterprise owners who are part of a related field experiment that provides them with shared-ownership financing to expand their business. Results reveal that equity-financed microenterprise owners chose investment options with a greater expected profit than those under debt financing, with heterogeneity analysis suggesting a larger effect for the most riskaverse individuals, who also exhibit a stronger preference for equity contracts when offered a choice. In the final part of the paper, I describe qualitative insights for why most microfinance institutions do not implement microequity products, using a field survey and manager interviews, which reveal the practical implementation challenges due to costly state verification, adverse selection into profit-sharing contracts and moral hazard caused by inappropriately-tailored sharing ratios

Pages: 62
Date: 2019-09-20, Revised 2019-09-20
New Economics Papers: this item is included in nep-ent, nep-exp, nep-fdg, nep-mfd and nep-sbm
References: Add references at CitEc
Citations:

Published by The Economic Research Forum (ERF)

Downloads: (external link)
http://erf.org.eg/publications/microequity-for-mic ... riment-and-survey-2/ (application/pdf)
https://bit.ly/35rhICq (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:erg:wpaper:1348

Access Statistics for this paper

More papers in Working Papers from Economic Research Forum Contact information at EDIRC.
Bibliographic data for series maintained by Namees Nabeel ().

 
Page updated 2024-05-13
Handle: RePEc:erg:wpaper:1348