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

Joseph P. Kaboski; Molly Lipscomb; Virgiliu Midrigan; Carolyn Pelnik

doi:10.3386/w29773

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

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

Working Paper 29773

DOI 10.3386/w29773

Issue Date February 2022

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).

We thank Erin Byrne, Shoshana Griffith, Regina Mannino, Grant Nelson, and Elizabeth Vranas for excellent research assistance. We thank participants for comments received on presentations of earlier versions of this research at Harvard/MIT, Ohio State, PUC Chile, and Y-RISE. Special thanks to Cynthia Kinnan for her insightful discussion of the paper at Y-RISE. We are grateful to the Kellogg Institute, the National Institute of Health, MasterCard Foundation, the Gates Foundation, and STEG for funding this project and research. This project was reviewed and approved by the Institutional Review Boards of the University of Notre Dame and the Uganda National Council for Science and Technology. This RCT was registered in the American Economic Association Registry for randomized control trials under trial number, AEARCTR-0002217. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Joseph P. Kaboski
Over the past three years, Kaboski has received substantial financial support from Yale Research Initiative on Innovation and Scale’s (Y-RISE), CEPR’s Structural Transformation and Economic Growth (STEG) Research Programme, the IMF, and the Becker-Friedman Institute. In addition, Kaboski has a paid position as Chair of the Academic Steering Committee of Structural Transformation and Economic Growth (STEG) Research Programme and unpaid positions on the boards of the Bureau for Research and Economic Analysis of Development (BREAD) and the Catholic Research Economists Discussion Organization (CREDO) and the Academic Advisory Council of the Institute for New Structural Economics (INSE) at Peking University.
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How Important are Investment Indivisibilities for Development? Experimental Evidence from Uganda

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