Working Paper: CEPR ID: DP17060
Authors: Joseph 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).
Keywords: poverty traps; financial deepening; land; savings dynamics
JEL Codes: O11; O12; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| indivisible investments + financial frictions (G19) | poverty traps (I32) |
| indivisible investments + financial frictions (G19) | risk-loving behavior (D81) |
| financial deepening (O16) | aggregate effects (when indivisible investments can be accumulated) (E22) |
| financial service expansion (G20) | limited impacts (when investments are primarily in land) (F69) |
| cash grants (H81) | investment decisions (G11) |
| investment decisions (G11) | economic outcomes (F61) |
| cash grants (H81) | land purchases (Q15) |
| cash grants (H81) | business investments (G31) |