STEG Working Paper

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

Joseph P. Kaboski, Molly Lipscomb, Virgiliu Midrigan, and Carolyn Pelnik

HowImportantAreInvestment.jpeg

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).

Related content

STEG Working Paper

The Stable Transformation Path

Francisco Buera, Martí Mestieri, Joseph P. Kaboski, Daniel O'Connor • The Stable Transformation Path
STEG Working Paper

Occupational Inheritance in Africa

Nicolas Syrichas • Research Theme 2: Labour, Home Production, and Structural Transformation at the Level of the Household
STEG Working Paper

Spatial Production Networks

Costas Arkolakis, Federico Huneeus, Yuhei Miyauchi • Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy
STEG Working Paper

Bureaucratic Nepotism

Juan Felipe Riaño • Research Theme 5: Political Economy and Public Investment