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The World Bank Economic Review Advance Access originally published online on November 2, 2008
The World Bank Economic Review 2008 22(3):457-482; doi:10.1093/wber/lhn017
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© The Author 2008. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

Experimental Evidence on Returns to Capital and Access to Finance in Mexico

David McKenzie and Christopher Woodruff

David McKenzie (corresponding author) is a senior economist in the Finance and Private Sector Research Unit of the Development Research Group at the World Bank;
Christopher Woodruff is an associate professor of economics at the Graduate School of International Relations and Pacific Studies at the University of California at San Diego; his email is cwoodruff{at}ucsd.edu

Correspondence: his email address is dmckenzie{at}worldbank.org

JEL codes: O17, O16, C93

A strong theoretical argument for focusing on access to finance is that financial market imperfections can result in large inefficiencies, as firms with productive investment opportunities underinvest. Lack of access to finance is a frequent complaint of microenterprises, which account for a large share of employment in developing countries. However, assessing the extent to which a lack of capital affects their business profits is complicated by the fact that business investment is likely to be correlated with a host of unmeasured characteristics of the owner and firm, such as entrepreneurial ability and demand shocks. In a randomized experiment that gave cash and in-kind grants to small retail firms, providing an exogenous shock to capital, the shock generated large increases in profits, with the effects concentrated among firms that were more financially constrained. The estimated return to capital was at least 20–33 percent a month—three to five times higher than market interest rates.


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