TY  - JOUR
AU  - Karlan, Dean
AU  - Knight, Ryan
AU  - Udry, Christopher
TI  - Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18325
PY  - 2012
Y2  - August 2012
DO  - 10.3386/w18325
UR  - http://www.nber.org/papers/w18325
L1  - http://www.nber.org/papers/w18325.pdf
N1  - Author contact info:
Dean Karlan
Kellogg Global Hub
Northwestern University
2211 Campus Drive
Evanston, IL 60208
Tel: 847/491-8706
E-Mail: dean.karlan@gmail.com

Ryan Knight
Yale University
70 Winchester Ave
New Haven, CT 06511
E-Mail: ryan.knight@yale.edu

Christopher R. Udry
Northwestern University
Department of Economics
Weinberg College of Arts and Sciences
2211 Campus Drive #3247
Evanston, IL 60208
Tel: 203/432-3637
E-Mail: christopher.udry@northwestern.edu
AB  - Many basic economic theories with perfectly functioning markets do not predict the existence of the vast number of microenterprises readily observed across the world. We put forward a model that illuminates why financial and managerial capital constraints may impede experimentation, and thus limit learning about the profitability of alternative firm sizes. The model shows how lack of information about one's own type, but willingness to experiment to learn one's type, may lead to short-run negative expected returns to investments on average, with some outliers succeeding. To test the model we put forward first a motivating experiment from Ghana, and second a small meta-analysis of other experiments. In the Ghana experiment, we provide inputs to microenterprises, specifically financial capital (a cash grant) and managerial capital (consulting services), to catalyze adoption of investments and practices aimed towards enterprise growth. We find that entrepreneurs invest the cash, and take the advice, but both lead to lower profits on average. In the long run, they revert back to their prior scale of operations. The small meta analysis includes results from 18 other experiments in which either capital or managerial capital were relaxed, and find mixed support for this theory.
ER  -