Please use this form to submit your study for inclusion into our database. It will be checked by a member of the Innovation Growth Lab team, who may be in contact to ask for more information. Your email address * Your name * Title * The name of the study Short summary In the context of microfinance in Sri Lanka, high variance in returns may limit the willingness of banks to lend to microenterprises, but it remains a puzzle why incremental growth and reinvestment remains such a challenges as many firms have exhibited a high level of returns. A brief description of the project's goals and its current state Abstract <p>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.</p> The full abstract of the study, if available Links http://qje.oxfordjournals.org/content/123/4/1329.short Links to any published papers and related discussions Authors * Affiliations Academic and other institutes that the authors of the study are members of Delivery partner Organisations involved in delivering the trial, if appropriate Year Year Year199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020202120222023202420252026 Month MonthJanFebMarAprMayJunJulAugSepOctNovDec Day Day12345678910111213141516171819202122232425262728293031 Journal Journal publishing the study, if available Publication stage * Working Paper Published Ongoing Research Forthcoming Discussion Paper Research theme * Entrepreneurship Innovation Business Growth Country Country or countries where this study took place. Topics What sort of topics does the study cover? Sample attributes Hypotheses / research question What are the returns to capital in microfinance? Do firms receiving funding from microfinance organisations hold the potential for income growth? Sample Trial population and sample selection 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. Number of treatment groups Size of treatment groups Round 1: 124 firms (84 receiving a 10,000 LKR treatment and 40 receiving a 20,000 LKR treatment); the amount was either granted in cash or in-kind; Round 3: 104 firms (62 receiving the 10,000 LKR treatment and 42 receiving the 20,000 LKR treatment); the amount was either granted in cash or in-kind; Total: 228 Size of control group Unit of analysis Clustered? Yes No Cluster details Trial attributes Treatment description One of four grants: 10,000 LKR in-kind (approx. $100 for equipment/inventory); 20,000 LKR in-kind (approx. $200 for equipment/inventory); 10,000 LKR in cash; 20,000 LKR in cash. Cash treatments were given without restriction. These four different treatments were allocated in the first round, and then in the third round, with no firm receiving a second treatment. Rounds of data collection 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 Evaluation Outcome variables <p>Capital stock, real profits, owner hours worked.</p> Results <p>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.</p> Intervention costs Not available. Cost benefit ratio 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. Citation for use in academic references