How Important are Indivisible Investments for Development? Experimental Evidence from Uganda

In theory, high yield, indivisible investments investment indivisibilities and the nonconvexities in production can play crucial roles in development, especially when financial frictions are present. When facing such investments, agents can be more risk-loving and impatient. This paper uses a cash grant experiment in rural and semi-urban Uganda to evaluate how quantitatively important these investment indivisibilities may be. Specifically, we offer households a choice between a safer, low payoff and a riskier, large payoff lotteries. We also offer them a chance between an safer payoff or riskier, larger payoff. We also offer them an opportunity to delay receipt, earning interest. Consistent with the presence of high yield, indivisible investments, we find significant rates of risk-loving demand (27 percent) and impatient demand (71 percent), and this demand is linked to savings and returns. Higher payoffs are associated with increased savings, especially if the payoffs are sufficient to enable indivisible investments. We calibrate a model with financial frictions and high yield, indivisible investments to the empirical results, and evaluate their importance for aggregate development and the impacts of financial frictions.