General Equilibrium Effects of Cash Transfers: Enterprise Dynamics

This project aims to better understand the capacity of informal SMEs to be a dynamic driver of private sector growth, specifically when granted unconditional government cash transfers.

Busara Center for Behavioral Economics
Country: 
Grants Round: 

The dynamics of informal sector small and medium enterprises (SMEs) remains an understudied area with key implications for vibrancy and potential of private-sector development. Little is known about the capacity of the private sector in Low Income Countries (LICs) to respond quickly to potential changes in demand. There is also limited evidence on the interaction between poverty alleviation programmes targeting households and SMEs. With governments in developing countries and NGOs increasingly turning to unconditional cash transfers (i.e money transfers to persons who do not have to meet any criteria) as a tool for poverty alleviation, this project seeks to explore whether new enterprises are created in response to the cash transfers and what the effect is of the large influx of cash on enterprise performance for those that receive transfers and those that do not.

Working with the NGO GiveDirectly, a two-level randomized controlled trial, which randomizes both the villages assigned to treatment and the intensity of treatment, was designed. The variation in treatment intensity allows the researchers to identify general equilibrium effects by comparing the performance of enterprises located among many transfer recipients versus those among fewer. A census will be conducted to determine the number of enterprises per village and to study enterprise creation. Surveys of enterprises will also be conducted prior to the distribution of the cash transfers, to collect information on owner demographics, number of employees, revenues, profits, prices of common goods, business assets and investment. These responses will be used to better understand the capacity of informal SMEs to be a dynamic driver of private sector growth.

The interaction between SMEs and poverty alleviation programmes is not well-understood, and this project can shed light on topics that will be relevant in many LICs.  In particular, local government officials in Kenya seeking to design policies to encourage women's entrepreneurship and increase the number of enterprises operating with formal permits will benefit.