Experimental Evidence on Returns to Capital and Access to Finance in Mexico

Microenterprises generally lack access to loans from formal financial institutions, and rely on their own savings and informal loans. Surveys indicate that the lack of access to finance is one of their most often mentioned complaints. This paper reports on a randomized field experiment conducted to measure returns to capital investments in microenterprises, in order to assess the extent to which a lack of capital affects their business profits. The experiment consisted of:

• Giving cash and capital stock to small retail firms, thereby providing an exogenous shock to capital;
• Measuring the profit-generating effects;
• Collecting data from a panel of microenterprises in Leon (Guanajuato), Mexico by administering five quarterly surveys starting from November 2005.

The available data indicated that returns are highest for microfinance institutions (MFIs) that make small loans.

• This might be a case for arguing that there is not a minimum level of investment below which returns to capital discourage entering into self employment;
• Furthermore, capital constraints operating through occupational choice do not appear to be a cause of permanent poverty traps;
• Capital constraints are still plausibly a source of some inefficiency.