Can Microfinance Unlock a Poverty Trap for Some Entrepreneurs?

62 Pages Posted: 7 Oct 2019

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: October 2019

Abstract

Can microcredit help unlock a poverty trap for some people by putting their businesses on a different trajectory? Could the small microcredit treatment effects often found for the average household mask important heterogeneity? In Hyderabad, India, we find that “gung ho entrepreneurs” (GEs), households who were already running a business before microfinance entered, show persistent benefits that increase over time. Six years later, the treated GEs own businesses that have 35% more assets and generate double the revenues as those in control neighborhoods. We find almost no effects on non-GE households. A model of technology choice in which talented entrepreneurs can access either a diminishing-returns technology, or a more productive technology with a fixed cost, generates dynamics matching the data. These results show that heterogeneity in entrepreneurial ability is important and persistent. For talented but low-wealth entrepreneurs, short-term access to credit can indeed facilitate escape from a poverty trap.

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Suggested Citation

Banerjee, Abhijit V. and Breza, Emily and Duflo, Esther and Kinnan, Cynthia, Can Microfinance Unlock a Poverty Trap for Some Entrepreneurs? (October 2019). NBER Working Paper No. w26346, Available at SSRN: https://ssrn.com/abstract=3465363

Abhijit V. Banerjee (Contact Author)

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

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Emily Breza

Harvard University ( email )

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Esther Duflo

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

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

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United States

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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

Duke University
Durham, NC 90097
United States

Cynthia Kinnan

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

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