STEG Working Paper Series

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

WP001 KaboskiLipscombMidriganPelnik HowImportantAreInvestmentIndivisibilitiesForDevelopment.pdf

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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).

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