Size-Dependent Credit Constraints and High Marginal Returns to Capital
RCTReview
Micro and small enterprises in developing countries face binding credit constraints that restrict their capital stock, leading to extraordinarily high marginal returns on small financial injections.
Picture this
Imagine a street food vendor who only has enough cash to buy ingredients day-by-day and makes $5 a day; giving them a $100 loan allows them to buy a small refrigerator and purchase ingredients in bulk, instantly doubling their daily earnings.
What the evidence says
$100-$200 cash grants to Sri Lankan microenterprises yielded a 5 percent monthly real return on capital; directed credit expansion to Indian medium-sized firms generated an annual return on loans close to 90 percent.
- Who was studied
- Microenterprises in Sri Lanka ($100-$200 grants) and medium-sized Indian manufacturing firms ($140,000-$640,000 capital stock).
- How
- Randomized controlled trial (De Mel et al. grants in Sri Lanka) and quasi-experimental policy evaluation of directed credit expansion (Banerjee & Duflo in India).
What to do
Expand targeted credit and micro-grant mechanisms for small-scale enterprises where marginal returns on capital injections remain exceptionally high.
From the source
"They found this increased capital stock and firm profits, with an implied real return to capital of five percent per month."
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