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

Author

Listed:
  • Joseph P. Kaboski
  • Molly Lipscomb
  • Virgiliu Midrigan
  • Carolyn Pelnik

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 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).

Suggested Citation

  • Joseph P. Kaboski & Molly Lipscomb & Virgiliu Midrigan & Carolyn Pelnik, 2022. "How Important are Investment Indivisibilities for Development? Experimental Evidence from Uganda," NBER Working Papers 29773, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29773
    Note: DEV EFG
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    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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