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RETURNS TO CAPITAL IN MICROENTERPRISES: EVIDENCE FROM A FIELD EXPERIMENT Christopher Woodruff, UCSD (With Bob Cull and David McKenzie). Paper prepared for the World Bank conference on Access to Finance March 15-16, 2007. The project.
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RETURNS TO CAPITAL IN MICROENTERPRISES: EVIDENCE FROM A FIELD EXPERIMENTChristopher Woodruff, UCSD(With Bob Cull and David McKenzie) Paper prepared for the World Bank conference on Access to Finance March 15-16, 2007
The project • We estimate returns to capital for a set of very small household enterprises. • No paid employees, capital of less than $US 1000 (~two-thirds of the income distribution in Mexico)
Returns to capital in microenterprises --Why do we care? • Large portion of urban labor market is self-employed. About one-quarter in Mexico • What is the potential for growth of these enterprises? • Financial market imperfections can result in large inefficiencies, underinvestment
Why might returns be high or low? • Low returns: • Several influential theory papers posit some minimum scale of investment / non-convex production sets (Banerjee and Newman 1993; Aghion and Bolton 1997) • High returns: • Capital constraints • Risk / uncertainty
Evidence on returns to capital in enterprises Among others: • Banerjee and Duflo 2003 (74%-100%) • Bigsten et al (30%) • Udry and Anogol 2006 (60%-250%) • De Mel, McKenzie and Woodruff 2007 (60%) • McKenzie and Woodruff 2006 (10%/month)
What is wrong with existing evidence? • Some from cross section: Worry about conflating ability and capital investment • Some from loan programs: Measure only for the self-selected sample that applies for credit • McKenzie and Woodruff suggests that returns are high in the broad sample of firms, yet take up rates for loan programs are low
The Experiment • Randomized experiment where we provide grants to enterprises to create exogenous variation in capital stock • Selected 207 retail firms in Leon, Guanajuato • Sample drawn from block-to-block survey of households in selected UPMs • Surveyed first in November 2005, then quarterly through November 2006 (5 waves)
Capital shock • After the first and third round of the survey, randomly selected firms were given capital shock • ~$140, in cash or equipment • 33% of mean baseline capital stock, 50% of mean monthly earnings • Use grants rather than loans because we want to measure the full spectrum of firms
Conclusions • Use random shocks to capital stock to estimate returns to capital • Data noisy, but suggest monthly returns in the 20%-35% range • Returns in the constrained firms • These returns are even higher than the returns we find from cross-sectional OLS data (attenuation?)