How Important are Investment Indivisibilities for Development? Experimental Evidence from Uganda
This paper uses a cash grant experiment to evaluate the importance of investment indivisibilities in areas with low coverage by financial services firms
Abstract
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% 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).
This is an output of the Structural Transformation and Economic Growth (STEG) programme
Citation
Kaboski, J. P., Lipscomb, M., Midrigan, V., and Pelnik, C. (2022) “How Important are Investment Indivisibilities for Development? Experimental Evidence from Uganda” NBER Working Paper 29773
Link
How Important are Investment Indivisibilities for Development? Experimental Evidence from Uganda