In this study we shall be eliciting subjective expectations of investment returns and future costs from the rural poor in India and using them to model individual investment behaviour.

The bulk of the literature on the issue focuses exclusively on actual outcomes and makes strong assumptions, such as rational expectations and homogeneous beliefs to proxy expectations. Our approach will be different: we will directly analyse data on subjective expectations that have been and will be elicited from respondents to a survey.

The information the agents possess and the beliefs they have determine the possible outcomes foreseen and their subjective probabilities. Examination of subjective expectations can be instructive about the accuracy of these expectations. The analysis of how investment behaviour relates to expectations is informative about the functioning of credit and insurance markets: a definition of credit market failure is the presence of expected returns above the market interest rate that do not generate investment activities. The research findings will contribute to our understanding of credit market failures and inform policies to address these.

Start date
14 April 2009
End date
13 August 2010
Grant holder
Dr Britta Augsburg
Professor Orazio Attanasio
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