DP17060 How Important are Investment Indivisibilities for Development? Experimental Evidence from Uganda

Author(s): Joseph Kaboski, Molly Lipscomb, Virgiliu Midrigan, Carolyn Pelnik
Publication Date: February 2022
Keyword(s): financial deepening, land, Poverty traps, savings dynamics
JEL(s): O11, O12, O16
Programme Areas: Financial Economics, Development Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17060

Theoretically, indivisible investments together with financial frictions can lower development, generate poverty traps, and lead agents to become risk-loving. Using experimental cash grants involving a choice between a safer, low payoff and a riskier, large payoff lottery, we find that 27 percent choose the riskier, larger lottery. Small grant winners invest in livestock and business inventory, while large grant winners invest in land, which exhibits high capital gains. Our quantitative model shows that the aggregate effects of financial deepening are sizable if the indivisible investment can be accumulated (e.g., capital) but not if it is in fixed supply (e.g., land).