microentrepreneurs and their money: three anomalies joint with dean karlan and sendhil mullainathan...
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Microentrepreneurs and their money: three anomalies
Joint with Dean Karlan and Sendhil Mullainathan
March 16, 2007
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Motivation
Microfinance has grown extremely fast Yet we know little about the production side –
the uses of money What are the investments that are profitable
enough to pay off MFIs? Investment environment?
Implications for MFIs Design of loan products Other financial products High-impact non-financial interventions
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Anomaly # 1: borrowing persistence A typical urban working poor profile
Has a small vegetable vending business Daily working capital cycle Borrows Rs. 1000 in the morning and repays Rs.
1100 at the end of the business day Has been in this cycle for 10 years
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Why is this an anomaly?
Return from not borrowing is 10% overnight! Working capital outlays small enough to be
‘saved up’ in a few months Power of compounding
Why do we observe this persistence of high-cost borrowing?
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Possible explanations
Mismeasuring ‘true cost’ of the loan Desire to keep relationship with money lender
Access to savings devices Intra-household savings conflicts Mis-construal of compounding
Do not understand how much they’re losing
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Current work
Give cash to get people out of debt trap Ask whether they fall back
Would rule out pure consumption constraints (i.e. could not cut back on consumption to finance getting out of trap)
Test efficacy of financial planning and savings interventions to prevent fall-back
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Anomaly # 2: too few joint production ventures Typical investment opportunity
2 types of cows: Rs. 5000 and Rs. 10000 Rs. 5000 cow yields Rs. 500/flush month Rs. 10,000 cow yields Rs. 1200/flush month So 10,000Rs. cow earns 20% higher rate of
return Why do joint liability group clients
consistently choose lower return cows?
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Why is this an anomaly?
Costs of cooperation do not deter from joint borrowing
Group solidarity hypothesis would predict more joint production
What are the implied limits to monitoring? Note: the cow production function is especially
simple Could alternate days in taking care of the cow Input feeding should be easy to monitor in small
groups
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Possible explanations
Joint production more expensive than joint liability
Joint liability is an added tax, but cheaper than alternative
Risk diversification
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Current work
Individual vs joint liability borrowing, Philippines (Gine and Karlan, 2006)
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Anomaly # 3: role of non-financial market failures What is going on in other markets that MFI clients
are part of? Labor? Asset rental?
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Why is this an anomaly?
How much are MFI investments sustained by these failures?
‘Unwitting entrepreneurs’? Is credit the best intervention?
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Possible explanations
Labor market failures (Emran, Morshed and Stiglitz, 2006)
High business risks and depreciation
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Planned work
Evaluate MFI interventions in secondary markets Daycare Asset rental Financing SMEs that employ MFI clients
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Thank you
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Buffalo cost 6000
Daily revenue 24
Monthly revenue 720
Annual revenue 5760
Annual feed cost 2400
Net profits 3360
Capital costs (25%) 1500
Net profits after capital costs
1860
Labor 2700
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Daily pushcart rental rate
30
Annual rental cost 10950
Cost to purchase 2000
Annual rent to cost ratio
5.475