Constrained firms, not subsistence activities: Evidence on capital returns and accumulation in Peruvian microenterprises

Abstract

We present a multi-period model of capital accumulation in order to investigate microenterprise (ME) production dynamics in a developing country context characterized by credit constraints and risk. These constraints are reflected in marginal returns to capital above market interest rates and we show that capital accumulation is faster in MEs with higher productivity, higher initial wealth and less risk exposure. We test our predictions using panel data for Peruvian MEs from 2002 to 2006. We indeed find high marginal returns to capital and sizable effects of household non-business wealth and, in contrast to previous studies, risk on capital accumulation in MEs. The findings of this paper can serve as a basis for the promotion of combined credit and risk management devices to enhance private sector development.