Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/98197
Authors: 
Karlan, Dean
Knight, Ryan
Udry, Christopher
Year of Publication: 
2012
Series/Report no.: 
Center Discussion Paper, Economic Growth Center 1014
Abstract: 
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.
Subjects: 
entrepreneurship
credit constraints
business training
consulting
managerial capital
entrepreneurship
credit constraints
business training
consulting
managerial capital
JEL: 
D21
D24
D83
D92
L20
M13
O12
Document Type: 
Working Paper

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