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RETURNS TO CAPITAL IN MICROENTERPRISES: EVIDENCE FROM A FIELD EXPERIMENT Christopher Woodruff, UCSD (With Bob Cull and PowerPoint Presentation
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RETURNS TO CAPITAL IN MICROENTERPRISES: EVIDENCE FROM A FIELD EXPERIMENT Christopher Woodruff, UCSD (With Bob Cull and - PowerPoint PPT Presentation


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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
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
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
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
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
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
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
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
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?)