PRECAUTIONARY SAVING, CREDIT CONSTRAINTS, AND IRREVERSIBLE INVESTMENT- THEORY AND EVIDENCE FROM SEMIARID INDIA

This article investigates the extent to which poor households are disc ouraged from making a nondivisible but profitable investment. Using da ta on irrigation wells in India, we estimate the parameters of a struc tural model of irreversible investment. Results shaw that poor farmers fail to undertake a profitable investment that they could, in princip le, self-finance because the nondivisibility of the investment puts it out of their reach. Irreversibility constitutes an additional disince ntive to invest. Simulations show that the availability of credit can dramatically increase investment in irrigation and that interest-rate subsidization has little impact.