Measuring Microenterprise Profits: Don't Ask How the Sausage is Made

By S. D. Mel, David J. McKenzie, Christopher Woodruff. 2007

292 citations recorded by the source corpus.

A large share of the world's poor is self-employed. Accurate measurement of profits from microenterprises is therefore critical for studying poverty and inequality, measuring the returns to education, and evaluating the success of microfinance programs. But a myriad of problems plague the measurement of profits. The authors report on a variety of different experiments conducted to better understand the importance of some of these problems and to draw recommendations for collecting profit data. In particular, they (1) examine how far we can reconcile self-reported profits and reports of revenue minus expenses through more detailed questions; (2) examine recall errors in sales and report on the results of experiments which randomly allocated account books to firms; and (3) ask firms how much firms like theirs underreport sales in surveys like this, and have research assistants observe the firms at random times 15-16 times during a month to provide measures for comparison. The authors conclude that firms underreport revenues by about 30 percent, that account diaries have significant effects on both revenues and expenses but not on profits, and that simply asking profits provides a more accurate measure of firm profits than detailed questions on revenues and expenses.

Subfields: Business and International Management, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/d2ae12e14b7fd305b62b02f6d86229cee8ee1a65

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Citations in the corpus

Systematic Review. What is the evidence of the impact of microfinance on the well-being of poor people? (2011, background): “Dehejia (2005) concluded that PSM is indeed not the panacea for solving the evaluation problem and pointed out that the correct specification of the propensity score is crucial, i.”
Recall length and measurement error in agricultural surveys (2020, background): “…(e.g. Beegle et al., 2012b; Troubat and Grünberger, 2017; Backiny-Yetna et al., 2017; Brzozowski et al., 2017; Engle-Stone et al., 2017; D’Alessio, 2017; Schündeln, 2018; Zezza et al., 2017), household enterprises (De Mel et al., 2009; Liedholm, 1991) and income measurement (Moore et al., 2000).”
War and local collective action in Sierra Leone (2009, background): “While there are many potential explanations for this low correlation, including true variation over time in the outcome of interest, McKenzie (2012) and De Mel et al. (2009) both suggest that measurement error in the outcome variables is substantial.”
Beyond Baseline and Follow-Up: The Case for More T in Experiments (2011, methodology): “much is the paradigm of baseline plus follow-up accepted that the excellent toolkit for randomization of Duflo et al. (2008) does not discuss at all the possibility of doing more than one pre-treatment or post-treatment round of surveying, let alone the choice of how many such rounds.”
What are We Learning from Business Training and Entrepreneurship Evaluations Around the Developing World? (2012, background): “De Mel et al. (2012) find that the impacts differ in the short and medium term in their study.”
The Benefits of Formalization: Evidence from Vietnamese Manufacturing SMEs (2012, background): “29. de Mel, McKenzie, and Woodruff (2009) find that microenterprise owners underreport revenues by about 30 pct. 30.”
Microenterprise growth and the flypaper effect: Evidence from a randomized experiment in Ghana (2014, methodology): “The variables used for stratification were motivated by the results in de Mel et al (2009a).”
Business Training and Female Enterprise Start-Up, Growth, and Dynamics: Experimental Evidence from Sri Lanka (2012, unknown): “De Mel et al. (2009b) discuss several reasons why these two measures of profits may differ, such as mismatches in the timing of input purchases and sales based on those purchases.”