Heterogeneous Capital Returns in Microenterprises
RCTReview
Traditional microfinance programs deliver uniform loan products across broad populations, assuming average capital constraints dictate business growth. However, treating microentrepreneurs as homogeneous obscures substantial underlying variation in returns to capital across individual entrepreneurs.
Picture this
Think of giving equal gallons of water to a row of different plants, where some are fully grown trees that absorb water rapidly and flourish, while others are small weeds that cannot utilize additional water. While the garden as a whole shows a modest average growth rate, the overall average hides the reality that a tiny subset of plants absorbed nearly all the benefit and produced the vast majority of the fruit.
What the evidence says
Unconditional cash grants produced average monthly returns of 10% to 11% (generating an extra INR 567 in monthly household income and INR 683 in monthly profits), while high-ability entrepreneurs achieved 24% to 30% monthly returns.
- Who was studied
- 1,345 microentrepreneur households in Amravati, Maharashtra, India, with US$1,000 or less in capital and no paid, permanent employees.
- How
- Randomized controlled trial distributing US$100 cash grants to a random one-third of participants, measuring monthly household income and enterprise profit impacts across baseline and four follow-up rounds.
What to do
Structure capital allocation programs to differentiate between average and high-return microenterprises rather than relying on uniform, population-wide microcredit disbursements.
From the source
"The increases in income and profits indicate that households on average had a return between 10-11 percent per month from the cash grant. Conversely, entrepreneurs ranked by their peers in the top third of the community had returns between 24-30 percent per month, around 3 times greater than the average entrepreneurs."
Impact_of_Community_Information_in_Identifying_High_Ability_Microentrepreneurs.pdf