Sri Lankan Small Business Grant Experiment on Credit Constraints
A 2008 field experiment in Sri Lanka by Suresh de Mel, David McKenzie, and Christopher Woodruff explored the returns to capital in microenterprises. In the study, small businesses were randomly selected to receive grants of approximately $100. The businesses that received the grants showed a significant increase in profitability, suggesting that their potential for profitable investment had been previously limited by credit constraints. This study was published in The Quarterly Journal of Economics.
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
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Nigerian Business Plan Competition Experiment on Credit Constraints
Sri Lankan Small Business Grant Experiment on Credit Constraints
An economist conducts an experiment to see if small-scale artisans in a town are limited by their ability to get funding for their businesses. The artisans are randomly divided into two groups. Group A receives a cash grant of $1,000. Group B receives no grant. After one year, the economist finds that artisans in Group A, on average, purchased 30% more raw materials and equipment and reported 25% higher business profits than artisans in Group B. What is the most logical conclusion to draw from these results?
Critique of a Credit Constraint Experiment
The Role of Randomization in Economic Experiments
Designing an Experiment to Identify Credit Constraints
In an experiment designed to test for credit constraints, observing that the group receiving a cash grant significantly increased their business investment is, by itself, sufficient evidence to conclude that these individuals were credit-constrained.
Interpreting Experimental Results on Credit Constraints
In an experiment designed to determine if entrepreneurs are held back by a lack of funding, researchers use several key components. Match each component with its specific role in establishing a causal link between receiving funds and business growth.
An economist wants to determine if a lack of access to funding is preventing farmers in a rural area from adopting a new, more productive type of seed. To do this, they design an experiment. Arrange the following steps in the logical order an economist would follow to conduct this experiment and reach a conclusion.
Interpreting Null Results in a Credit Constraint Experiment
In an experiment designed to test for credit constraints, researchers randomly give a cash grant to one group of entrepreneurs (the treatment group) but not to another (the control group). By comparing the business outcomes of the treatment group to the control group, the researchers can isolate the ____ effect of the grant, helping them determine if a lack of funds was the primary barrier to growth.
Learn After
A field experiment provided randomly selected small-business owners in Sri Lanka with unexpected cash grants, while a control group received nothing. The study found that businesses receiving the grants subsequently earned significantly higher profits than those in the control group. Based only on this result, what is the most direct economic interpretation?
Evaluating the External Validity of an Economic Experiment
Interpreting a Hypothetical Experimental Outcome
In a well-known experiment, small businesses in Sri Lanka that were randomly given cash grants of approximately $100 subsequently showed a significant increase in their monthly profits compared to businesses that did not receive a grant. A commentator, upon hearing this, argues: 'This isn't surprising. Of course if you give someone money, their financial situation improves. It doesn't prove anything about their investment opportunities.' Which statement best evaluates the primary flaw in this commentator's argument?
Evaluating an Alternative Experimental Design
A field experiment randomly provided cash grants to small-business owners, resulting in a significant increase in their monthly profits. This outcome indicates the businesses had profitable investment opportunities they were previously unable to fund. Based on this reasoning, a similar profit increase would be expected if the same experiment were conducted with large, established corporations that have easy access to bank loans.
Interpreting Divergent Experimental Results
An economic development agency conducts an experiment in a rural region. They randomly select 1,000 small-scale farmers and divide them into two groups. The 'treatment' group of 500 farmers each receives a one-time, no-strings-attached cash grant of $200. The 'control' group of 500 farmers receives nothing. Both groups' farm profits are tracked for one year. The study finds that the average annual profit for the treatment group is 50% higher than the control group. Which of the following is the most robust conclusion that can be drawn from this evidence?
Calculating and Interpreting Return on Capital
Justifying the Experimental Design