NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development

Dean Karlan, Ryan Knight, Christopher Udry

NBER Working Paper No. 18325
Issued in August 2012
NBER Program(s):   CF   LE   LS

Many basic economic theories with perfectly functioning markets do not predict the existence of the vast number of microenterprises readily observed across the world. We put forward a model that illuminates why financial and managerial capital constraints may impede experimentation, and thus limit learning about the profitability of alternative firm sizes. The model shows how lack of information about one’s own type, but willingness to experiment to learn one’s type, may lead to short-run negative expected returns to investments on average, with some outliers succeeding. To test the model we put forward first a motivating experiment from Ghana, and second a small meta-analysis of other experiments. In the Ghana experiment, we provide inputs to microenterprises, specifically financial capital (a cash grant) and managerial capital (consulting services), to catalyze adoption of investments and practices aimed towards enterprise growth. We find that entrepreneurs invest the cash, and take the advice, but both lead to lower profits on average. In the long run, they revert back to their prior scale of operations. The small meta analysis includes results from 18 other experiments in which either capital or managerial capital were relaxed, and find mixed support for this theory.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18325

Users who downloaded this paper also downloaded these:
Fafchamps, McKenzie, Quinn, and Woodruff w17207 When is capital enough to get female microenterprises growing? Evidence from a randomized experiment in Ghana
Dupas and Robinson w14693 Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya
Fairlie, Karlan, and Zinman w17804 Behind the GATE Experiment: Evidence on Effects of and Rationales for Subsidized Entrepreneurship Training
De Mel, McKenzie, and Woodruff Who are the Microenterprise Owners? Evidence from Sri Lanka on Tokman versus De Soto
Glaeser, Kerr, and Kerr w18333 Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us