by taking advantage of various sources of credit that were available in a village prior to microfinance introduction). Thus, our estimates on two comparison groups can be thought of as straddling the biased upward estimates (relative to those without loans) and biased downward estimates (relative to those with other loans) and hence provide valuable information on the magnitude of entrepreneurial spirit bias for future studies of microfinance. Finally, we use data on self-reported loan purpose to identify entrepreneurial borrowers (those who borrow for new business or to repay old business loans) and nonentrepreneurial borrowers. We perform sample splits and compare expenditures among more entrepreneurial borrowers to nonentrepreneurial borrowers.

We have four main results. First, we present a profile of MFI borrowers, who are more likely to be middle-aged, have low education, be relatively poor (i.e., they have overcrowded living conditions), and have prior MFI experience. The characteristics of MFI borrowers are mostly similar when compared to households without any loans versus those with other types of loans.

Second, we find a significant increase in many of the expenditure categories: increased durable purchases, home repairs, festivals, and temptation goods. However, the categories of expenditure that are significantly increased represent a relatively minor share of total expenditures. Thus, food and nondurable expenditures, which are the largest shares of the total expenditure, show no significant changes. This explains why we do not find a significant increase in the total expenditure either.

Third, our results suggest that the entrepreneurial spirit bias is likely to be relatively small because the differences between our two comparison groups are relatively small. In addition, we find increased ‘nonproductive’ expenditures (such as festivals, temptation goods, and home repairs), which are unlikely to be subject to the entrepreneurial spirit bias. These expenditures, while improving utility in the short term, are unlikely to lead to any significant longterm transformation.

Fourth, we find that durable expenditures increase significantly more for entrepreneurial borrowers versus nonentrepreneurial borrowers. However, the temptation goods results are mixed: relative to no loan group entrepreneurial and nonentrepreneurial MFI borrowers increase temptation goods, while relative to other loans group only nonentrepreneurial group increases temptation goods purchases.

Finally, we compare the results from the PSM method to RCT results obtained on the same dataset by Banerjee et al. (2015b). Two of our main results—the increase in durables and the lack of overall increase in total expenditures and food expenditures—are the same using both methods. However, some important results are different (such as expenditures on festivals and temptation goods), and we discuss potential reasons for these differences. We conclude with the discussion of the potential merits of the PSM method and the caveats that apply.

Some earlier papers used other nonexperimental methods to estimate the impact of microfinance on actual borrowers, most notably Pitt and Khandker (1998) and Khandker (2006). However, these studies are still surrounded by controversy; see, for example, the re-evaluation by Roodman and Morduch (2014) and a response to re-evaluation by Pitt (2014). In light of this mixed evidence, our paper serves as an important addition to a scant nonexperimental microfinance evaluation literature.

The PSM method has successfully been used in many different settings.<sup>5</sup> To the best of our knowledge, only Floro and Swain (2012) have previously used the PSM method to study the 5. For example, Jalan and Ravallion (2003a) use PSM to study the gains in child health from access to piped water in rural India, Jalan and Ravallion (2003b) study impact of the workfare program in Argentina, Godtland et al. (2004) 4