The Cream of the Crop: Targeting High Ability Entrepreneurs Using Microcredit Group Information

The study proposes an alternative means to measure entrepreneurial ability by leveraging existing networks of micro-credit clients to identify and target high ability entrepreneurs who can transition their enterprises to SMEs.

Background
The transition from micro-enterprises to Small and Medium enterprises (SMEs) is not a very common phenomenon in the developing world. The focus of research investigating growth of enterprises has shifted to identifying and targeting a sub-set of entrepreneurs who are capable of growing their enterprises into SMEs, when provided with credit and training. Most of these recent studies focus on defining entrepreneurial ability to identify high calibre entrepreneurs on the basis of cognitive, personality and psychometric tests. This study proposes an alternative means of identifying such entrepreneurs, by leveraging existing networks of micro-credit clients in a developing world context.
Approach
The field experiment was conducted in Amravati, a city in Maharashtra, with 1,345 entrepreneurs. Respondents and their nearest neighbours were assigned to peer groups of 4-6 persons. The entrepreneurs were asked to rank their peer group members on predicted marginal returns to capital, profits, and other firm, owner, and household characteristics. Once the community reports were complete, grants worth USD 100 were randomly assigned to one third of the entrepreneurs in order to induce growth and assess the accuracy of respondents’ predictions. The accuracy of community information was evaluated by comparing the true performance of the individuals against the ranking they received from their peer groups.
Implications
Findings from the study support the proposed theory that community members can accurately identify high-return entrepreneurs. Despite plenty of literature on information diffusion within networks, there are few that present empirical evidence on the same. Insights from this study shed new light on scope and depth of social knowledge contained in rural and peri-urban networks. This study also contributes to emerging literature on the implementability of methods developed within the theoretical mechanism design literature.

Thematic area

Financial Inclusion

Project Leads

Natalia Rigol

Location

Amravati, Maharashtra

Status

Completed