Countries? ” If there exist aggregate production functions representing approximately the same technology across countries, then the vastly higher output per worker in richer countries implies that capital per worker must be much higher in these countries, and diminishing returns implies a much lower rate of return to capital in rich than in poor countries. The details of the calculation depend, of course, on specific assumptions. However, the magnitudes are sufficiently large that the absence of massive capital flows to the poorest countries is properly seen as a fundamental puzzle. Lucas considers the possibility that capital market imperfections permit the existence of a gap in the returns to capital across countries, but argues that this cannot account for most of the difference implied by his calculation. He, therefore, raises the possibility that there are huge differences in human capital across countries, and externalities associated with these differences imply that returns to physical capital are not so different across countries with even large differences in physical capital per worker. Accordingly, there is no mystery about the lack of physical capital flows. In contrast, Abhijit V. Banerjee and Esther C. Duflo (2005) review a good deal of evidence, mostly from India, showing widely varying and often very high real interest rates. In addition, ∗We are grateful to Marcus Noland for the initial conversation that led to this paper, to Erica Field, Barbara O’Brien and Yuichi Kitamura for valuable comments, and to Hyungi Woo, Tavneet Suri, and Patrick Amihere

We study a unique field experiment in India in which 1.5 million stock investors face lotteries for the random allocation of shares. We find that the winners of these randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold them than lottery losers 1, 6, and even 24 months after the random allocation. This finding strongly evokes laboratory findings of an “endowment effect” for risky gambles, and persists in samples of highly active investors, suggesting along with additional evidence that this behaviour is not driven by inertia alone. The effect decreases as experience in the IPO market increases, but remains even for very experienced investors. Leading theories of the endowment effect based on reference-dependent preferences are unable to fully explain these and other findings in the data.