Returns to Capital in Microenterprises: Evidence from a Field Experiment

Suresh de Mel (), David McKenzie and Christopher Woodruff

No 2934, IZA Discussion Papers from Institute of Labor Economics (IZA)

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. We use a randomized experiment to overcome this problem, and to measure the return to capital for the average microenterprise in our sample, regardless of whether or not they apply for credit. We 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, we find the average real return to capital to be 5.7 percent per month, substantially higher than the market interest rate. We 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.

Keywords: microenterprises; returns to capital; self-employment (search for similar items in EconPapers)
JEL-codes: O12 O17 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2007-07
New Economics Papers: this item is included in nep-dev, nep-ent, nep-exp and nep-mfd
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Citations: View citations in EconPapers (19)

Published - published in: Quarterly Journal of Economics, 2008, 123 (4), 1329-1372

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Related works:
Journal Article: Returns to Capital in Microenterprises: Evidence from a Field Experiment (2009)
Journal Article: Returns to Capital in Microenterprises: Evidence from a Field Experiment (2008)
Working Paper: Returns to capital in microenterprises: evidence from a field experiment (2007)
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