The Returns to Capital for SMEs: Evidence from India

There is extensive evidence that very small firms face credit constraints and have high returns to capital. There is similar rigorous evidence for very large firms, but for developing countries, there is a 'missing middle': we know little about the returns to capital of SMEs. This research project aims to address this gap, and explore the question of whether SMEs in India are similarly credit constrained, with high returns to capital.  

By partnering with the largest microfinance institution that has just acquired a banking license to grow an SME practice, the researchers will randomize access to additional loans within a sample of existing SME borrowers. Offering the random sample substantially larger loans than the ones they are currently receiving will allow the researchers to collect information relevant to measuring the marginal product of the loans and the risk associated with lending more.

A broad policy question is whether misallocation of capital amongst firms can have meaningful macroeconomic consequences, and whether this misallocation is due to credit constraints. This project will aim to contribute to the debate on this question, and also to shed light on the narrower policy question of the effects of granting banking licenses to MFIs in India. 


Esther Duflo

Massachusetts Institute of Technology

Abhijit Banerjee

Massachusetts Institute of Technology

Matt Lowe

University of British Columbia