Aid on Spreadsheets

The effect of financial contracts on growing firms´ technology use. Evidence from a randomized experiment in Uganda.

We examine how key aspects of the most common form of financing-debt-may inhibit young firms´ expansion. Starting a business entails learning and risk taking, implying that project returns can be backloaded or uncertain. Also, indivisible start-up costs often require large investments. Meanwhile, features of the standard debt contract, such as a constant repayment stream and caps on the initial loan, may distort investment toward inputs that involve less learning, less uncertainty, and smaller projects; hampering firm growth. Together with BRAC Uganda´s lending program we study the effect of the credit terms on starting firms´ input use, profits, and repayment performance. Using a randomized controlled trial design we offer different repayment schemes, indivisible goods´ subsidies, or advice on how to shorten the learning process to test if the standard contract restricts firms that face indivisible costs or are plagued by backloaded or uncertain returns. The project will provide unique evidence on the constraints caused by the interaction of financial structure and technology use that complements the recent emphasis on access to finance. A better grasp of the economic impact of debt design offers insights to entrepreneurial behavior both in developing and developed markets. Also, shedding light on contractual mechanisms that affect business investments is important to guide policies aimed at firm growth, especially given the development community´s focus on credit programs.

Project ID

SE-0-SE-29-2013-6374-285-43082

Activity status

2 - Implementation

Aid type

D02 - Other technical assistance

% to Uganda

100.00

Organisations

Funding

Sweden

Extending

The Swedish Research Council

Implementing

Stockholms universitet

CRS code	%
Research/scientific institutions (43082)	100.0