Working Paper: NBER ID: w29773
Authors: Joseph P. 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: Investment Indivisibilities; Development; Cash Grants; Financial Frictions; Poverty Traps
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 |
|---|---|
| cash grants (H81) | investment decisions (G11) |
| grant size (H81) | investment type (G11) |
| risk preference (D81) | financial capability (G53) |
| indivisible investments + financial frictions (G19) | poverty traps (I32) |
| aggregate effects of financial deepening (F65) | investment accumulation (E22) |
| investment decisions (G11) | consumption (E21) |
| riskier lottery choice (H27) | wealth (D14) |