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

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RETURNS TO CAPITAL IN MICROENTERPRISES: EVIDENCE FROM A FIELD EXPERIMENT ... We estimate returns to capital for a set of very small household enterprises. ... – PowerPoint PPT presentation

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


1
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

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
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10
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11
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

12
What part of the population?
13
Random Assignment to treatment
14
Attrition something to address
15
Returns to capital
16
Returns to capital
17
Attrition Lower Lee bounds
18
Heterogeneity of returns
19
High returns to MFIs making small loans
20
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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