High Marginal Return to Microenterprise Capital
RCTReview
Micro-entrepreneurs in developing economies remain trapped in low-income equilibria because credit market rigidities prevent them from accumulating the capital stock necessary to exploit extremely high marginal returns to capital.
Picture this
If buying an extra Rs 1,000 worth of carpentry tools allows a woodworker to earn an extra Rs 110 every month forever, the tools pay for themselves quickly. However, if the lender demands immediate weekly installments that exceed initial cash flows, the woodworker can never buy the tools in the first place.
What the evidence says
Estimated monthly return on business capital was 11.0% in the top-coded sample (95% CI: 2.4%–19.7%) and 13.0% in the full sample (95% CI: 1.0%–26.0%), generating an Rs 23,594 to Rs 28,770 increase in long-run business capital stock (an 81.0% increase over control).
- Who was studied
- N = 766 urban microenterprises in Kolkata, India surveyed nearly 3 years post-disbursement.
- How
- Instrumental Variables (IV) linear regression of profits on total capital stock, instrumented by random assignment to a grace period contract and controlling for labor hours.
What to do
Structure loan duration and capital sizing using instrumental variable return estimates to ensure borrowers can achieve self-sustaining capital compounding.
From the source
"The point estimates imply monthly returns of 13.0 percent for the full sample (column 2) and 11 percent for the top coded sample (column 4)... corresponding to a monthly return of capital of 11.0 percent."
101_290 microfinance and entrepreneurship AER2013.pdf