Returns to Capital in Microenterprises: Evidence from a Field Experiment

We use randomized grants to generate shocks to capital stock for a set of Sri Lankan microenterprises. We find the average real return to capital in these enterprises is 4.6%–5.3% per year), substantially higher than market interest rates. We then examine the heterogeneity of treatment effects. Returns are found to vary with entrepreneurial ability and with household wealth, but not to vary with measures of risk aversion or uncertainty. Treatment impacts are also significantly larger for enterprises owned by males; indeed, we find no positive return in enterprises owned by females.

Policy implications

Random in-kind or cash donations have the potential to address capital misallocation, but primarily for entrepreneurs with high ability or fewer workers.

Additional information

Hypotheses/research question

What are the returns to capital in microfinance? Do firms receiving funding from microfinance organisations hold the potential for income growth?

Study design

Parallel-group

The survey was restricted to firms with less than 100,000 Sri Lankan rupees in capital other than land and building. It took place in three Southern and South-Western districts of Sri Lanka: Kalutara, Galle and Matara (the survey is designed to also study the process of recovery of microenterprises from the December 26, 2004 Indian Ocean tsunami). The 2001 Sri Lankan Census was used to select 25 GNs (administrative divisions) in these three districts. GNs were selected based on their high percentage of own-account workers and modest education levels. A door-to-door screening survey was carried out among 3,361 households, to identify self-employed workers outside of agriculture, transportation, fishing, and professional services who were between the ages of 20 and 65 and had no paid employees. 618 firms constitute the baseline sample. Excluding the firms directly affected by the tsunami leaves a baseline sample of 408 enterprises.

Cost benefit ratio

Not available.

Rounds of data collection

Baseline (April 2005) + 8 additional waves of the panel survey conducted at quarterly intervals, through April 2007. Of the 408 firms in the baseline survey, 369 completed the ninth wave.

Baseline data collection and method

Survey; detailed information on the firm and characteristics of the firm owner: profit, revenues and expenses, replacement cost of assets, whether assets were owned or rented.

Data collection method and data collected

Firms were surveyed in quarterly waves detailing information about purchase of new assets, the disposition of assets by sale or damage, and the repair and return to service of any previously damaged assets.

Unit of analysis

Business

Stratification

Yes: Stratification within districts (Kalutara, Galle and Matara) and zones (directly affected, indirectly affected, unaffected by the tsunami).

Reference

de Mel, S., McKenzie, D. & Woodruff, C., 2008. 'Returns to Capital in Microenterprises: Evidence from a Field Experiment'. The Quarterly Journal of Economics, MIT Press, November, vol. 123(4), pages 1329-1372.

Returns to Capital in Microenterprises: Evidence from a Field Experiment

Key information

Additional information

Key facts

Update trial