Targeting High Ability Entrepreneurs Using Community Information: Mechanism Design In The Field

Microentrepreneurs in low-income countries have widely varying marginal returns to capital, yet identifying those with the best opportunities remains a challenge due to a scarcity of verifiable information. With a cash grant experiment in India we demonstrate that community knowledge can help target high-growth microentrepreneurs; while the average marginal return to capital in our sample is 11% per month, microentrepreneurs reported to be in the top third of the community are estimated to have marginal return to capital between 23% and 35% per month. We cannot reject that microentrepreneurs ranked in the middle and bottom terciles of the community have a marginal return to capital of zero. Further we find evidence that community members distort their predictions when they can influence the distribution of resources. Finally we demonstrate that appropriately designed elicitation mechanisms can realign incentives for truthful reporting. These methods may be useful for using community information to target resources in other contexts, especially when targeting based on predicted treatment effects or when community members may have incentives to distort their predictions.