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Financial constraints block low-capital individuals with superior managerial talent from starting new enterprises, suppressing industry productivity growth by choking off competitive reallocation.
$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.
At baseline, 82.5% of the 160 microentrepreneurs had never accessed formal credit markets. Over the entire two-year study period, all 160 tailors combined took a total of only 13 informal loans from non-bank sources, demonstrating near-zero reliance on informal debt markets.
Risk credit constraint significantly decreases the probability of purchasing inorganic fertilizer (coefficient = -0.275, p < 0.01). Quantity credit constraint also significantly reduces fertilizer purchase probability (coefficient = -0.251, p < 0.01).