Research Sarah Pearlman

Abstract: Microfinance has become a popular part of poverty reduction agendas of policymakers, development advocates, and multilateral institutions since its inception roughly 30 years ago.  Despite dramatic growth, however, many microfinance institutions face low penetration rates.  It turns out many potential borrowers choose not to participate.  Current explanations for this phenomenon largely focus on skill, arguing that high skill entrepreneurs have expected returns above the borrowing rate and select microfinance while low skill entrepreneurs do not and stay away.  In this paper I contend these explanations are insufficient because they ignore risk altogether, a fundamental driver of poor household’s behavior.  I propose consideration of 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 whether or not a household can “afford” microfinance, and using data from ACP, a large, profit-oriented microfinance institution in Peru, I find positive 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, however, 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 that the only impediments are 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.  I define a simple theoretical model showing 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.   

Abstract: The final chapter of my dissertation will examine the links between formal credit use, entrepreneurial choice and vulnerability using new, cross-sectional data on urban micro-entrepreneurs in Ecuador.  The data set is a representative survey of all urban, micro-entrepreneurs in the country and reveals interesting information about microenterprises.  One particularly salient finding is that a strikingly low number of micro-entrepreneurs use formal credit either for enterprise start-up or for on-going business needs.  Less than 5% register using formal credit for either purpose.  I plan to explore whether or not vulnerability partially explains this phenomenon.