Abstract
This paper develops a theoretical framework to explain the limited effect of business development programs (BDPs) on entrepreneurs’ profits. We argue that a mismatch between a BDP’s narrow focus on business-promoting strategies and the wider context in which microentrepreneurs operate can limit the impact of business training. In our framework, entrepreneurs are ambiguity averse and have multiple sources of income (e.g., business and wage incomes). We show that for a sufficiently ambiguity-averse entrepreneur with multiple income sources, efficient training can result in a decline in expected profit. Notably, when the wider context (multiple income sources, ambiguity aversion) is considered, the business training impact is limited and can result in a posttraining expected profit decline. This limited impact is caused by the diversifying role that the business income plays in household finances.
Highlights
Muhammad Yunus, in his “Banker to the Poor,” argued that teaching microentrepreneurs is a waste (Yunus 1999)
2 ADB Economics Working Paper Series No 614. Another explanation suggested in the empirical literature is that one reason for the weakness of business development programs (BDPs) and the business training they provide is related to their narrow focus on businesspromoting strategies, which ignores the wider economic context in which microfinance clients operate
Nonbusiness income does not depend on the capital investment but can depend on the state of nature. It is well documented in the literature that households commonly rely on multiple income sources,1 yet this assumption is rarely used in the theoretical microfinance literature, where nonbusiness incomes are typically normalized to 0.2 As we show in this paper, disregarding multiple sources of income results in a loss of generality
Summary
Muhammad Yunus, in his “Banker to the Poor,” argued that teaching microentrepreneurs is a waste (Yunus 1999). Bruhn and Zia (2011) trained 445 clients in Bosnia and Herzegovina They found that while basic financial knowledge improved, there was no improvement in the survival rate of business start-ups. They find that profit declines, though insignificantly. De Mel, McKenzie, and Woodruff (2014) compared self-reported profits to revenue and cost figures and controlled for detailed measures of accounting practices as a further robustness check. They found no significant evidence that training changes reporting. They further conjectured that business training programs might be less effective than previously thought
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