Experimental Evidence on Returns to Capital and Access to Finance in Mexico

By David J. McKenzie, Christopher Woodruff. 2008

453 citations recorded by the source corpus.

A strong theoretical argument for focusing on access to finance is that financial market imperfections can result in large inefficiencies, as firms with productive investment opportunities underinvest. Lack of access to finance is a frequent complaint of microenterprises, which account for a large share of employment in developing countries. However, assessing the extent to which a lack of capital affects their business profits is complicated by the fact that business investment is likely to be correlated with a host of unmeasured characteristics of the owner and firm, such as entrepreneurial ability and demand shocks. In a randomized experiment that gave cash and in-kind grants to small retail firms, providing an exogenous shock to capital, the shock generated large increases in profits, with the effects concentrated among firms that were more financially constrained. The estimated return to capital was at least 20-33 percent a month-three to five times higher than market interest rates.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/57ef0351d1ee55b3d5c6144d30cfaa81c814c783

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Citations in the corpus

Win Some Lose Some? Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco (2013, background): “But existing evidence suggests that returns to capital in Mexico are about 200% for microentrepreneurs (D. J. McKenzie and Woodruff 2006; D. McKenzie and Woodruff 2008), raising the possibility of transformative positive impacts.”
Generating Skilled Self-Employment in Developing Countries: Experimental Evidence from Uganda* (2014, background): “Evidence from a Randomized Experiment in Ghana.””
Access to Finance (2010, unknown): “In these interventions, some people get larger transfers, some smaller, depending on a decision formula that leaves an important part of the allocation to chance. de Mel, McKenzie and Woodruff (2008b), for example, study 408 small firms in Sri Lanka and offer them a range of cash or in-kind prizes (”
The Persistent Power of Behavioral Change: Long-Run Impacts of Temporary Savings Subsidies for the Poor (2018, unknown): “These numbers, while large, are consistent with existing estimates in the literature, which range from 4 to 33 percent per month (Blattman et al. 2014; McKenzie and Woodruff 2008).”
Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province (2015, unknown): “[50] McKenzie, David and Christopher Woodruff (2008).”
Giving Credit Where It Is Due (2010, result): “The pattern of these results is replicated for tiny retail firms in Mexico in McKenzie and Woodruff (2008), where they find even higher marginal productivities of capital (20 to 33 percent per month, and between 900 percent and 3000 percent per year).”
Financial Literacy and Financial Behaviour: Experimental Evidence from Rural Rwanda (2016, background): “For example, McKenzie and Woodruff (2008) ﬁnd that small injections of working capital have high rates of return, and Bruhn et al. (2013) report that an expansion of bank credit increases household income and employment for low-income households in Mexico.”
The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence (2014, unknown): “…to capital increases average profitability of male-run microenterprises, but challenge the central claim that it does so for female-run businesses (see McKenzie & Woodruff 2008 on male-run businesses in Mexico, and de Mel, McKenzie, & Woodruff, 2008 on male- and female-run businesses in Sri Lanka).”
The Effects of Business Accelerators on Venture Performance: Evidence from Start-Up Chile (2017, background): “…has defined and studied managerial capital as an input factor for established firms (Bertrand and Schoar 2003; de Mel, McKenzie, and Woodruff 2008; McKenzie and Woodruff 2008; Bloom, Sadun, and Van Reenen 2016), we focus on the input factors useful for emerging transformational ventures (Schoar…”