The Cream of the Crop: Identifying High Ability Entrepreneurs through Community Information

This project attempts to utilise community information to identify high-potential entrepreneurs who can transition their micro-enterprises into SMEs.  

A puzzle that remains in the literature on firms and entrepreneurship in low-income economies is that of the ‘missing middle’: the transition of micro-enterprises to Small and Medium Enterprises (SMEs). Evidence is emerging that providing capital to a broad base of micro-entrepreneurs may not have lasting impacts. This might occur because such programmes have not been targeting entrepreneurs who are most likely to transition to SMEs given sufficient credit. Discerning between high and low-potential entrepreneurs in environments characterized by asymmetric information and borrowers without access to collateral is critical to the success and sustainability of both lenders and the businesses they support. Successfully identifying high-growth firms can result in better targeting of resources and thus increased returns for lenders and the enterprises they serve.

The project will first assess how much information about entrepreneurial ability and borrower reliability is present in the social networks of communities in which microentrepreneurs operate. The researchers will ask community members to rank their entrepreneur peers on various metrics of entrepreneurial ability and borrower reliability. To induce business growth, they will then randomly allocate grants to these firms. Business outcomes such as marginal returns to capital (business growth), profitability, and household income, will be measured and evaluated to see if the information provided was predictive of these outcomes. Eliciting reliable information from communities, however, is not a straightforward task. The study will therefore also test various mechanisms for eliciting truthful reports from community members: paying respondents for the accuracy of reports and varying whether reports are collected in private or in public.

This project also responds to the challenges faced by policymakers in helping women realize their economic potential. In India, female labour force participation is only 24.2%, well below the world average of about 50%. One way of bringing women into the labour force is by providing credit for self-employment activities. Yet, studies find that female business tend to have on average zero or even negative returns to capital. As nearly half of the sample used in for the study is composed of female firm owners, this project will add to evidence on the determinants of successful female businesses.