A field experiment in Sri Lanka provides informal firms incentives to formalize. Information abou... more A field experiment in Sri Lanka provides informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs does not increase registration. Payments equivalent to one-half to one month (alternatively, two months) of the median firm's profits leads to registration of around one-fifth (alternatively, one-half ) of firms. Land ownership issues are the most common reason for not registering. Follow-up surveys 15 to 31 months later show higher mean profits, but largely in a few firms that grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state. (JEL C93, D22, L25, L26, O14)
Who Are the Microenterprise Owners? Evidence from Sri Lanka on Tokman v. de Soto * Is the vast ar... more Who Are the Microenterprise Owners? Evidence from Sri Lanka on Tokman v. de Soto * Is the vast army of the self-employed in low income countries a source of employment generation? We use data from surveys in Sri Lanka to compare the characteristics of own account workers (non-employers) with wage workers and with owners of larger firms. We use a rich set of measures of background, ability, and attitudes, including lottery experiments measuring risk attitudes. Consistent with the ILO's views of the self employed (represented by Tokman), we find that 2/3rds to 3/4ths of the own account workers have characteristics which are more like wage workers than larger firm owners. This suggests the majority of the own account workers are unlikely to become employers. Using a two and a half year panel of enterprises, we show that the minority of own account workers who are more like larger firm owners are more likely to expand by adding paid employees. The analysis suggests that finance is not the sole constraint to growth of microenterprises, and provides an explanation for the low rates of growth of enterprises supported by microlending.
World Bank policy research working paper, Jul 1, 2012
The Impact Evaluation Series has been established in recognition of the importance of impact eval... more The Impact Evaluation Series has been established in recognition of the importance of impact evaluation studies for World Bank operations and for development in general. The series serves as a vehicle for the dissemination of findings of those studies. Papers in this series are part of the Bank's Policy Research Working Paper Series. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
World Bank policy research working paper, May 24, 2007
Small and informal firms account for a large share of employment in developing countries. The rap... more Small and informal firms account for a large share of employment in developing countries. The rapid expansion of microfinance services is based on the belief that these firms have productive investment opportunities and can enjoy high returns to capital if given the opportunity. However, measuring the return to capital is complicated by unobserved factors such as entrepreneurial ability and demand shocks, which are likely to be correlated with capital stock. We use a randomized experiment to overcome this problem, and to measure the return to capital for the average microenterprise in our sample, regardless of whether or not they apply for credit. We accomplish this by providing cash and equipment grants to small firms in Sri Lanka, and measuring the increase in profits arising from this exogenous (positive) shock to capital stock. After controlling for possible spillover effects, we find the average real return to capital to be 5.7 percent per month, substantially higher than the market interest rate. We then examine the heterogeneity of treatment effects to explore whether missing credit markets or missing insurance markets are the most likely cause of the high returns. Returns are found to vary with entrepreneurial ability and with measures of other sources of cash within the household, but not to vary with risk aversion or uncertainty.
A large share of the World's poor is self-employed. Accurate measurement of profits from microent... more A large share of the World's poor is self-employed. Accurate measurement of profits from microenterprises is therefore critical for studying poverty and inequality, measuring the returns to education, and evaluating the success of microfinance programs. However, a myriad of problems plague the measurement of profits. This paper reports on a variety of different experiments conducted to better understand the importance of some of these problems, and to draw recommendations for collecting profit data. In particular, we (i) examine how far we can reconcile self-reported profits and reports of revenue minus expenses through more detailed questions; (ii) examine recall errors in sales, and report on the results of experiments which randomly allocated account books to firms; and (iii) asked firms how much firms like theirs underreport sales in surveys like ours, and had research assistants observe the firms at random times 15-16 times during a month to provide measures for comparison. We conclude that firms underreport revenues by about 30 percent, that account diaries have significant impacts on both revenues and expenses, but not on profits, and that simply asking profits provides a more accurate measure of firm profits than detailed questions on revenues and expenses.
American Economic Journal: Applied Economics, Jun 1, 2009
The Policy Research Working Paper Series disseminates the findings of work in progress to encoura... more The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
This brief examines whether labor market imperfections stop microenterprises from growing, using ... more This brief examines whether labor market imperfections stop microenterprises from growing, using an experiment in Sri Lanka that provided wage subsidies to small firms to help them hire workers.
The Statement of Loans is divided into two volumes. Each volume is organized by region, and withi... more The Statement of Loans is divided into two volumes. Each volume is organized by region, and within region by country department and country. The country department and country name are printed on the lower right corner of each page. The following index provides an easy means to refer to the report. The regional data is followedby the information on loans to IFC and Taiwan, Province of China. Please note that all questions concerning the contents of this report should be referred to the Loan Accounting and Borrower services Division, Controller's Questions or changes concerning distrbution should be referred to Mail and Distribution, General Services.
Previous research shows that capital injections lead to higher profits in microenterprises, but t... more Previous research shows that capital injections lead to higher profits in microenterprises, but to little sustained growth. We conduct an experiment which provides overlapping treatments designed to provide capital, incentives to hire new employees and management training. Working with a sample of 1,525 Sri Lankan enterprises with two or fewer paid employees at baseline, we find that the treatments have largely temporary effects, suggesting that while they may speed convergence to a steady state, they do not appear to put firms on a different growth path. Wage incentives lead to higher levels of employment, but not to higher profits, suggesting that the typical firm does not face constraints to hiring which result in the marginal product of labor exceeding the market wage rate. We use data from surveys of wage workers and SME owners conducted at the same time as the baseline survey to estimate characteristics associated with entrepreneurial ability. We find that highability firms, if anything, benefit less from the treatments. The results are consistent with the view of the world illuminated by Lucas" 1978 model of firm size distribution.
The Review of Economics and Statistics, Mar 1, 2022
We introduce a new mobile money interface that permits Sri Lankans to deposit mobile airtime bala... more We introduce a new mobile money interface that permits Sri Lankans to deposit mobile airtime balances directly into a formal bank account. Randomizing access and prices, we find a small increase in savings deposits with the partner institution and formal banks more generally, but no change in overall savings. When the deposit transaction costs are completely removed, only 26% use the mobile deposit service and only 7% use it frequently. Our results imply that deposit transaction costs are not a significant barrier to increasing savings, limiting the potential gains of mobile-linked savings products for financial inclusion.
and the World Bank for helpful comments. All opinions offered represent those of the authors alon... more and the World Bank for helpful comments. All opinions offered represent those of the authors alone, and do not necessarily reflect the views of the World Bank, its Executive Directors, or the countries they represent. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Replication data for "Deposit collecting: Unbundling the role of frequency, salience, and ha... more Replication data for "Deposit collecting: Unbundling the role of frequency, salience, and habit formation in generating savings". De Mel, S., McIntosh, C., & Woodruff, C. (2013). The American Economic Review, 103(3), 387-392
The self employed make up around a third of the non-agricultural labor force in low-income countr... more The self employed make up around a third of the non-agricultural labor force in low-income countries. A substantial majority of these self employed work alone, hiring no paid employees. These own account workers represent half or more of the informal sector in low-income countries. Is informality a way station on the road to wage work or a stepping stone for nascent entrepreneurs? The academic / policy world has widely divergent views on this question. Victor Tokman expresses the view that that the army of own account workers is marginalized and biding time until an opportunity for wage work: “Informal activities [arise from] the failure of the economic system to create enough productive employment ” (Tokman 2007). Hernando de Soto is perhaps the best known exponent for the opposite point of view. Starting with The Other Path in 1989, de Soto holds that microenterprise owners are entrepreneurs who, but for constraints they face on various fronts, might well run larger enterprises. I...
The debate about the impact of microfinance on low-income households has drawn attention to the f... more The debate about the impact of microfinance on low-income households has drawn attention to the fact that microfinance is generally synonymous with microcredit. The poor lack of low-cost and secure microsavings alternatives. Technological advances, particularly related to mobile telephony, raise the possibility of low transactions cost savings programs. The widespread use of M-PESA in Kenya has generated considerable attention. (See Jack and Suri, 2010.) But the business model of M-PESA is built very much on money transfers rather than personal savings. Can a bank-linked savings product be viable as a savings alternative? Which types of households will use the product, and how will those households be affected by access to secure, low-cost savings? Those are the questions that motivate the research described here. The need for regular savings is generated by the income and expenditure patterns of low-income households, described in intricate detail in both Rutherford (2000) and Collins et al (2009). Income comes in small amounts on a regular basis: the majority of the participants in our study receive income on a daily basis as either self-employed workers or daily-paid casual wage workers. But some expenditures-for medical or other emergencies, weddings and other festivals, and durable goods-are large but infrequent. Low-cost, secure savings may help low-income household accumulate the larger amounts they need.
A field experiment in Sri Lanka provides informal firms incentives to formalize. Information abou... more A field experiment in Sri Lanka provides informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs does not increase registration. Payments equivalent to one-half to one month (alternatively, two months) of the median firm's profits leads to registration of around one-fifth (alternatively, one-half ) of firms. Land ownership issues are the most common reason for not registering. Follow-up surveys 15 to 31 months later show higher mean profits, but largely in a few firms that grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state. (JEL C93, D22, L25, L26, O14)
Who Are the Microenterprise Owners? Evidence from Sri Lanka on Tokman v. de Soto * Is the vast ar... more Who Are the Microenterprise Owners? Evidence from Sri Lanka on Tokman v. de Soto * Is the vast army of the self-employed in low income countries a source of employment generation? We use data from surveys in Sri Lanka to compare the characteristics of own account workers (non-employers) with wage workers and with owners of larger firms. We use a rich set of measures of background, ability, and attitudes, including lottery experiments measuring risk attitudes. Consistent with the ILO's views of the self employed (represented by Tokman), we find that 2/3rds to 3/4ths of the own account workers have characteristics which are more like wage workers than larger firm owners. This suggests the majority of the own account workers are unlikely to become employers. Using a two and a half year panel of enterprises, we show that the minority of own account workers who are more like larger firm owners are more likely to expand by adding paid employees. The analysis suggests that finance is not the sole constraint to growth of microenterprises, and provides an explanation for the low rates of growth of enterprises supported by microlending.
World Bank policy research working paper, Jul 1, 2012
The Impact Evaluation Series has been established in recognition of the importance of impact eval... more The Impact Evaluation Series has been established in recognition of the importance of impact evaluation studies for World Bank operations and for development in general. The series serves as a vehicle for the dissemination of findings of those studies. Papers in this series are part of the Bank's Policy Research Working Paper Series. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
World Bank policy research working paper, May 24, 2007
Small and informal firms account for a large share of employment in developing countries. The rap... more Small and informal firms account for a large share of employment in developing countries. The rapid expansion of microfinance services is based on the belief that these firms have productive investment opportunities and can enjoy high returns to capital if given the opportunity. However, measuring the return to capital is complicated by unobserved factors such as entrepreneurial ability and demand shocks, which are likely to be correlated with capital stock. We use a randomized experiment to overcome this problem, and to measure the return to capital for the average microenterprise in our sample, regardless of whether or not they apply for credit. We accomplish this by providing cash and equipment grants to small firms in Sri Lanka, and measuring the increase in profits arising from this exogenous (positive) shock to capital stock. After controlling for possible spillover effects, we find the average real return to capital to be 5.7 percent per month, substantially higher than the market interest rate. We then examine the heterogeneity of treatment effects to explore whether missing credit markets or missing insurance markets are the most likely cause of the high returns. Returns are found to vary with entrepreneurial ability and with measures of other sources of cash within the household, but not to vary with risk aversion or uncertainty.
A large share of the World's poor is self-employed. Accurate measurement of profits from microent... more A large share of the World's poor is self-employed. Accurate measurement of profits from microenterprises is therefore critical for studying poverty and inequality, measuring the returns to education, and evaluating the success of microfinance programs. However, a myriad of problems plague the measurement of profits. This paper reports on a variety of different experiments conducted to better understand the importance of some of these problems, and to draw recommendations for collecting profit data. In particular, we (i) examine how far we can reconcile self-reported profits and reports of revenue minus expenses through more detailed questions; (ii) examine recall errors in sales, and report on the results of experiments which randomly allocated account books to firms; and (iii) asked firms how much firms like theirs underreport sales in surveys like ours, and had research assistants observe the firms at random times 15-16 times during a month to provide measures for comparison. We conclude that firms underreport revenues by about 30 percent, that account diaries have significant impacts on both revenues and expenses, but not on profits, and that simply asking profits provides a more accurate measure of firm profits than detailed questions on revenues and expenses.
American Economic Journal: Applied Economics, Jun 1, 2009
The Policy Research Working Paper Series disseminates the findings of work in progress to encoura... more The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
This brief examines whether labor market imperfections stop microenterprises from growing, using ... more This brief examines whether labor market imperfections stop microenterprises from growing, using an experiment in Sri Lanka that provided wage subsidies to small firms to help them hire workers.
The Statement of Loans is divided into two volumes. Each volume is organized by region, and withi... more The Statement of Loans is divided into two volumes. Each volume is organized by region, and within region by country department and country. The country department and country name are printed on the lower right corner of each page. The following index provides an easy means to refer to the report. The regional data is followedby the information on loans to IFC and Taiwan, Province of China. Please note that all questions concerning the contents of this report should be referred to the Loan Accounting and Borrower services Division, Controller's Questions or changes concerning distrbution should be referred to Mail and Distribution, General Services.
Previous research shows that capital injections lead to higher profits in microenterprises, but t... more Previous research shows that capital injections lead to higher profits in microenterprises, but to little sustained growth. We conduct an experiment which provides overlapping treatments designed to provide capital, incentives to hire new employees and management training. Working with a sample of 1,525 Sri Lankan enterprises with two or fewer paid employees at baseline, we find that the treatments have largely temporary effects, suggesting that while they may speed convergence to a steady state, they do not appear to put firms on a different growth path. Wage incentives lead to higher levels of employment, but not to higher profits, suggesting that the typical firm does not face constraints to hiring which result in the marginal product of labor exceeding the market wage rate. We use data from surveys of wage workers and SME owners conducted at the same time as the baseline survey to estimate characteristics associated with entrepreneurial ability. We find that highability firms, if anything, benefit less from the treatments. The results are consistent with the view of the world illuminated by Lucas" 1978 model of firm size distribution.
The Review of Economics and Statistics, Mar 1, 2022
We introduce a new mobile money interface that permits Sri Lankans to deposit mobile airtime bala... more We introduce a new mobile money interface that permits Sri Lankans to deposit mobile airtime balances directly into a formal bank account. Randomizing access and prices, we find a small increase in savings deposits with the partner institution and formal banks more generally, but no change in overall savings. When the deposit transaction costs are completely removed, only 26% use the mobile deposit service and only 7% use it frequently. Our results imply that deposit transaction costs are not a significant barrier to increasing savings, limiting the potential gains of mobile-linked savings products for financial inclusion.
and the World Bank for helpful comments. All opinions offered represent those of the authors alon... more and the World Bank for helpful comments. All opinions offered represent those of the authors alone, and do not necessarily reflect the views of the World Bank, its Executive Directors, or the countries they represent. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Replication data for "Deposit collecting: Unbundling the role of frequency, salience, and ha... more Replication data for "Deposit collecting: Unbundling the role of frequency, salience, and habit formation in generating savings". De Mel, S., McIntosh, C., & Woodruff, C. (2013). The American Economic Review, 103(3), 387-392
The self employed make up around a third of the non-agricultural labor force in low-income countr... more The self employed make up around a third of the non-agricultural labor force in low-income countries. A substantial majority of these self employed work alone, hiring no paid employees. These own account workers represent half or more of the informal sector in low-income countries. Is informality a way station on the road to wage work or a stepping stone for nascent entrepreneurs? The academic / policy world has widely divergent views on this question. Victor Tokman expresses the view that that the army of own account workers is marginalized and biding time until an opportunity for wage work: “Informal activities [arise from] the failure of the economic system to create enough productive employment ” (Tokman 2007). Hernando de Soto is perhaps the best known exponent for the opposite point of view. Starting with The Other Path in 1989, de Soto holds that microenterprise owners are entrepreneurs who, but for constraints they face on various fronts, might well run larger enterprises. I...
The debate about the impact of microfinance on low-income households has drawn attention to the f... more The debate about the impact of microfinance on low-income households has drawn attention to the fact that microfinance is generally synonymous with microcredit. The poor lack of low-cost and secure microsavings alternatives. Technological advances, particularly related to mobile telephony, raise the possibility of low transactions cost savings programs. The widespread use of M-PESA in Kenya has generated considerable attention. (See Jack and Suri, 2010.) But the business model of M-PESA is built very much on money transfers rather than personal savings. Can a bank-linked savings product be viable as a savings alternative? Which types of households will use the product, and how will those households be affected by access to secure, low-cost savings? Those are the questions that motivate the research described here. The need for regular savings is generated by the income and expenditure patterns of low-income households, described in intricate detail in both Rutherford (2000) and Collins et al (2009). Income comes in small amounts on a regular basis: the majority of the participants in our study receive income on a daily basis as either self-employed workers or daily-paid casual wage workers. But some expenditures-for medical or other emergencies, weddings and other festivals, and durable goods-are large but infrequent. Low-cost, secure savings may help low-income household accumulate the larger amounts they need.
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