Research Sarah Pearlman

Abstract:  Despite dramatic growth of microfinance programs over the past 30 years many microfinance institutions face low penetration rates.  It turns out many potential borrowers choose not to participate.  Current explanations largely focus on skill, arguing that high skill entrepreneurs generate expected returns above the borrowing rate and select microfinance while low skill entrepreneurs do not and stay away.  I contend these explanations are insufficient because they ignore risk altogether and propose vulnerability, defined as the inability to smooth consumption across negative income shocks, as an additional factor driving microfinance selection.  I outline a model in which the risk level of projects and a household’s ability to manage risk help determine if a household can “afford” microfinance.  Using data from ACP, a large, profit-oriented microfinance institution in Peru, I find evidence that vulnerability is significant in determining microfinance participation.  These results suggest risk and vulnerability should be incorporated into subsequent analyses of the effectiveness of microfinance as a poverty alleviation tool.     

Abstract: Microenteprises are increasingly recognized as major generators of income and employment in the developing world.  Recent surveys suggest that the sector is plagued by low productivity, leading some to claim that reducing impediments to microenterprise productivity is necessary to reduce urban poverty.  Given mixed evidence on lack of credit and entrepreneurial skill, I propose vulnerability, defined as the inability to smooth consumption across negative shocks, as an additional barrier to highly productive enterprises.  Since high yield projects likely carry more risk than low yield projects, I argue households choose high yield enterprises over low yield alternatives only if they are able to manage higher levels of risk.  In a simple theoretical model I show that vulnerability leads households to dedicate fewer resources to high yield/high risk enterprises.  Using data on urban microentrepreneurs in Lima, Peru I find empirical corroboration of this prediction, suggesting that vulnerability helps drive enterprise choice and may explain a portion of low productivity in the microenterprise sector.  Finally I show that households with microfinance dedicate more resources to high yield/high risk projects, implying there may be a link between enterprise choice and microfinance use.   

• Can Low Returns to Capital Explain Low Formal Credit Use? Evidence from Microentrepreneurs in Ecuador. [PAPER]

• Informal Finance and Low Bank Use in Immigrant Communities (joint with Sarah Bohn)