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.
Capital stock, real profits, owner hours worked.
Capital stock: Grants are associated with an increase in capital stock. Real profits: Random cash or in-kind grants increase profits of microenterprises by over 5% per month, or at least 60% per year. These treatment impacts appear to be flat or decreasing. Marginal returns are highest for entrepreneurs with more ability and with fewer other workers in the household. The variance in the impact of treatments is very large, and is somewhat related to owner, household and firm characteristics, but is not fully explained by these factors. This high variance may explain why so few of these enterprises borrow from formal lenders. Hours worked: Grants are associated with an increase in the hours the owner works in the enterprise. The marginal productivity of the owner's additional work effort yields returns of 4.6%-5.3% per month, 55%-63% per year. These high returns at low levels of capital stock imply that this production set is unlikely to lead to permanent poverty traps.