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

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 EXPERIMENT Christopher Woodruff, UCSD (With Bob Cull and

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  1. 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

  2. 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)

  3. 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

  4. 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

  5. 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)

  6. Returns from ENAMIN data

  7. 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

  8. 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)

  9. 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

  10. What part of the population?

  11. Random Assignment to treatment

  12. Attrition something to address

  13. Returns to capital

  14. Returns to capital

  15. Attrition: Lower Lee bounds

  16. Heterogeneity of returns

  17. High returns to MFIs making small loans

  18. 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?)

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