Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development

Dean Karlan
Ryan Knight
Christopher Udry
Publication Type: 
Working Papers
Publication Article File: 
Publication Year: 
2012

We show how financial and managerial constraints impede experimentation, and thus limit learning about the profitability of investments. Imperfect information about one’s own type, but willingness to experiment to learn one’s type, leads to short‐run negative expected returns to investments, with some outliers succeeding. We find in an experiment that entrepreneurs invest randomized grants of cash, and adopt advice from randomized grants of consulting services, but both lead to lower profits on average. In the long run, they revert back to their prior scale of operations. In a meta‐analysis, results from 19 other experiments find mixed support for this theory.

This working paper is related to Christopher Udry's CFSP research project "Examining Underinvestment in Agriculture."

JEL Codes: 
D21, D24, D83, D92, L20, M13, O12
Region: 
Africa (Sub-Sahara)
Country: 
Ghana
Topic: 
Credit
Topic: 
Enterprise
Topic: 
Experiments
Topic: 
Economic Modeling