Do Credit Constraints Limit Entrepreneurship? Heterogeneity in the Returns to Microfinance

59 Pages Posted: 19 Feb 2018

See all articles by Abhijit V. Banerjee

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics

Emily Breza

Harvard University

Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics; Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Bureau for Research and Economic Analysis of Development (BREAD)

Cynthia Kinnan

Northwestern University - Department of Economics

Date Written: September 1, 2017

Abstract

Can improved access to credit jump-start microenterprise growth? We examine subjects in urban Hyderabad, India, six years after microfinance–an intervention commonly believed to lower the cost of credit and spark business creation–was randomly introduced to a subset of neighborhoods. We find large benefits both in business scale and performance from giving “gung-ho entrepreneurs” (GEs)–those who started a business before microfinance entered–more access to microfinance. Notably, these effects persist two years after microfinance was withdrawn from Hyderabad. However, any persistent benefits to “reluctant entrepreneurs” (REs), those without prior businesses, are much more meager and generally indistinguishable from zero. A model of technology choice in which REs can only access a diminishing-returns technology, while GEs can also access a technology with high fixed costs but high returns, can generate dynamics matching those observed in the data. These results suggest that heterogeneity in entrepreneurial ability is important and persistent; and that lenders entering a new market may be better off by focusing on borrowers at the intensive rather than extensive margin. We also provide some of the first evidence on the relationship between formal and informal credit from an individual’s social network. While microfinance crowds out informal finance for the novices, the informal financial relationships of seasoned entrepreneurs exhibit complementarities with access to formal credit.

Keywords: microfinance, entrepreneurship, social networks

JEL Classification: D03, D14, D21, G21, O16, Z13

Suggested Citation

Banerjee, Abhijit V. and Breza, Emily and Duflo, Esther and Kinnan, Cynthia, Do Credit Constraints Limit Entrepreneurship? Heterogeneity in the Returns to Microfinance (September 1, 2017). Buffett Institute Global Poverty Research Lab Working Paper No. 17-104. Available at SSRN: https://ssrn.com/abstract=3126359 or http://dx.doi.org/10.2139/ssrn.3126359

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-252D
Cambridge, MA 02142
United States
617-253-8855 (Phone)
617-253-6915 (Fax)

Emily Breza

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-544
Cambridge, MA 02139
United States
617-258-7013 (Phone)
617-253-6915 (Fax)

Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

Cambridge, MA
United States

HOME PAGE: http://www.povertyactionlab.org/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
Durham, NC 90097
United States

Cynthia Kinnan (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

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