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

A strong theoretical argument for focusing on access to finance is that financial market imperfections can result in large inefficiencies, with firms with productive investment opportunities underinvesting. Lack of access to finance is a frequent complaint of microenterprises, which account for a large share of employment in developing countries. However, assessing the extent to which a lack of capital affects their business profits is complicated by the fact that business investment is likely to be correlated with a host of unmeasured characteristics of the owner and firm, such as entrepreneurial ability and demand shocks. We report on the results of a randomized experiment which gave cash and in-kind grants to small retail firms, providing an exogenous shock to capital. We find that this shock generated large increases in profits, with the effects concentrated on firms which were more financially constrained. The estimated return to capital is found to be at least 20 to 33 percent per month, three to five times higher than market interest rates.