Can Microfinance Unlock a Poverty Trap for Some Entrepreneurs?

Abhijit Banerjee, Emily Breza, Esther Duflo and Cynthia Kinnan

No 26346, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Can microcredit help unlock a poverty trap for some people by putting their businesses on a different trajectory? In Hyderabad, India, where microfinance was found to have very little short-run impact on the average business, 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 comparable households in control neighborhoods. They also borrow substantially more from other (non-microfinance) sources. 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.

JEL-codes: D25 O1 O14 O16 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-ent
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Citations: View citations in EconPapers (41)

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Working Paper: Can Microfinance Unlock a Poverty Trap for Some Entrepreneurs? (2019)
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