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What accounts for the discrepancy between the microfinance impact claims of development practitioners and the far smaller impacts found in experimental studies? We demonstrate in a simple theoretical framework why "before-and-after" observations of practitioners overstate microfinance impacts and why estimations in some recent randomized trials understate the average treatment effect on the treated (ATT). Our empirical study uses a unique data set from eastern Nepal to study the impact of microfinance in villages where microfinance did not previously exist. We find that approximately three-fourths of the apparent impact of microfinance observed by practitioners is an illusion driven by correlated unobservable factors.


Presented at the Pacific Conference for Development Economics, UC Davis, March 17, 2012. Presented at the U.C. Berkeley Development Lunch Seminar, February 6, 2013. November 2014. Forthcoming, World Development.

Forthcoming, World Development.

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