Returns to Capital in Microenterprises: Evidence from a Field Experiment

By S. D. Mel, David J. McKenzie, Christopher Woodruff. Social Science Research Network, 2007

1,337 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/c8a42c5659bacb999512949fd9f6e2db8d02b4b6

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Citations in the corpus

The Persistent Power of Behavioral Change: Long-Run Impacts of Temporary Savings Subsidies for the Poor (2018, positive): “in the literature, most of which range between 5 percent per month (de Mel et al. 2008; Udry and Anagol 2006) to 33 percent per month (McKenzie and Woodruff 2008). It is also worth noting that my results are strikingly consistent with other evidence from Africa – Udry and Anagol (2006) estimate a 0.”
Access to Finance (2010, positive): “In contrast to the Karlan and Zinman (2009) study of the impact of credit in the Philippines and de Mel et al. (2008) study of returns to capital, here the impacts are found only among female entrepreneurs.”
Beyond Baseline and Follow-Up: The Case for More T in Experiments (2011, methodology): “1A shows autocorrelations for monthly profits from the Sri Lankan microenterprises in de Mel et al. (2008) which were measured at three month intervals, and uses data from similar microenterprises measured monthly in de Mel et al. (2009) to show the autocorrelation in monthly profits at the one mont”
Do Interest Rates Matter? Credit Demand in the Dhaka Slums (2012, background): “3 Other open questions about microcredit include the rate of return in microenterprises (de Mel et al., 2008), the impact of microcredit access on borrowing households (Banerjee et al., 2009), and the role of contracting mechanisms (e.g., Giné and Karlan, 2009).”
Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province (2015, neutral): “8See, for example, de Mel et al. (2008), Fafchamps et al. (2011), McKenzie and Woodru (2008).”