The Economics of Poverty Traps
edited by Christopher B. Barrett, Michael Carter, Jean-Paul Chavas and Michael R. Carter
University of Chicago Press, 2018
Cloth: 978-0-226-57430-1 | Electronic: 978-0-226-57444-8
DOI: 10.7208/chicago/9780226574448.001.0001


What circumstances or behaviors turn poverty into a cycle that perpetuates across generations? The answer to this question carries especially important implications for the design and evaluation of policies and projects intended to reduce poverty. Yet a major challenge analysts and policymakers face in understanding poverty traps is the sheer number of mechanisms—not just financial, but also environmental, physical, and psychological—that may contribute to the persistence of poverty all over the world.

The research in this volume explores the hypothesis that poverty is self-reinforcing because the equilibrium behaviors of the poor perpetuate low standards of living. Contributions explore the dynamic, complex processes by which households accumulate assets and increase their productivity and earnings potential, as well as the conditions under which some individuals, groups, and economies struggle to escape poverty. Investigating the full range of phenomena that combine to generate poverty traps—gleaned from behavioral, health, and resource economics as well as the sociology, psychology, and environmental literatures—chapters in this volume also  present new evidence that highlights both the insights and the limits of a poverty trap lens.

The framework introduced in this volume provides a robust platform for studying well-being dynamics in developing economies. 


Christopher B. Barrett is the Stephen B. and Janice G. Ashley Professor of Applied Economics and Management, professor of economics, and International Professor of Agriculture at Cornell University, where he also serves as deputy dean and dean of academic affairs at the S.C. Johnson College of Business.
Michael R. Carter is professor of agricultural and resource economics at the University of California, Davis, and directs the Feed the Future Innovation Lab for Assets and Market Access and the Index Insurance Innovation Initiative (I4). He is a fellow of the Bureau for Research and Economic Analysis of Development and the American Agricultural Economics Association and a research associate of the NBER.
Jean-Paul Chavas is the Anderson-Bascom Professor of Agricultural and Applied Economics at the University of Wisconsin–Madison and a member of the board of directors of the NBER.



DOI: 10.7208/chicago/9780226574448.003.0000
[conditional convergence;dynamic feedback;human capital;depression;aspirations and preferences;multiple equilibria;risk and shocks]
While the world has seen much economic growth and poverty reduction over the last few decades, extreme poverty persists. It is important to understand how households accumulate assets and increase their productivity and earning potential, as well as the conditions under which some individuals, groups, and economies struggle to escape poverty, and when and why adverse shocks have persistent welfare consequences. This introductory chapter introduces an integrative model that frames a range of possible poverty trap mechanisms explored in more detail in the book’s other chapters. The model elucidates more commonly discussed poverty trap mechanisms (financial market failures, risk, and undernutrition) as well as their interaction with less frequently discussed mechanisms, including mental health, aspirations, and desires. All these features may lead to endogenous behavioral patterns that in equilibrium lead households not to take actions that would enable them to escape poverty over time. We emphasize how and why these effects can be heterogeneous across household types and economic/policy environments. We also explore the implications for the effectiveness of programs and policies designed to address persistent extreme poverty, such as cash transfers and microfinance. (pages 1 - 20)
This chapter is available at:
    University of Chicago Press

I. Nutrition, Health, and Human Capital Formation

DOI: 10.7208/chicago/9780226574448.003.0001
[education;health;nutrition;early life;financial crisis;natural disaster;Indonesia]
Human capital has played a key role in the poverty traps literature. Economic shocks affecting human capital during early life may permanently reduce levels of human capital and push individuals into poverty. Three concerns in this literature are explored with empirical evidence drawn from primary longitudinal survey data collected before and after two major shocks in Indonesia: the 1998 financial crisis and the 2004 Indian Ocean tsunami. First, it is hard to identify shocks that are unanticipated and uncorrelated with other factors that affect human capital outcomes. Second, focusing on child health and human capital, we document that individuals, families, and communities invest in strategies designed to mitigate such shocks. The nature and effectiveness of these behaviors vary with the context in ways that are difficult to measure or model. Third, shocks’ effects on child human capital outcomes in the short and longer-term may differ precisely because of the behavioral changes of individuals and their families so that drawing inferences about longer-term impacts based on negative short-term impacts can be misleading. The picture of resilience that emerges from investigating the impacts of major shocks on child health and human capital in the face of these two major shocks is stunning. (pages 23 - 56)
This chapter is available at:
    University of Chicago Press

DOI: 10.7208/chicago/9780226574448.003.0002
[poverty;cognitive function;decision-making;productivity;attention;memory;inhibitory control]
This paper is a primer for economists interested in the relationship between poverty and cognitive function. We begin by discussing a set of underlying aspects of cognitive function relevant to economic decision-making—attention, inhibitory control, memory, and higherorder cognitive functions—including descriptions of validated tasks to measure each of these areas. Next, we review literature that investigates channels through which poverty might impact cognitive function and economic behavior, by discussing already existing knowledge as well as less well-researched areas that warrant further exploration. We then highlight ways in which the different aspects of cognitive function may impact economic outcomes, discussing both theoretical models and empirical evidence. Finally, we conclude with a discussion of open research questions and directions for future research. (pages 57 - 124)
This chapter is available at:
    University of Chicago Press

II. Psychology of Poverty, Hope, and Aspirations

DOI: 10.7208/chicago/9780226574448.003.0003
[depression;mental health;beliefs]
Major depressive disorder (MDD) is one of the most prevalent mental illnesses worldwide. Existing evidence suggests that it has both economic causes and consequences, such as unemployment. However, depression has not received significant attention in the economics literature, and existing work is almost entirely empirical. We see great potential for traditional, theoretical economic analysis to both develop new insights about depression, and to form new connections to other areas of economics. In this paper, we begin with an overview of the canonical symptoms of depression, identifying a set of key facts that lend themselves well to economic analysis. We illustrate these facts with descriptive analysis of data from Indonesia. We then discuss what we see as fruitful avenues for new theoretical work, building on those facts. (pages 127 - 152)
This chapter is available at:
    University of Chicago Press

DOI: 10.7208/chicago/9780226574448.003.0004
[hope;poverty;development;aspirations;microfinance;community banking;randomized trial;agency;Mexico;gender empowerment]
The majority of the research on poverty traps has concentrated on dynamics arising from external constraints such as missing credit, labor, and land markets or structural features such as locally increasing returns to scale in production. Recent work in behavioral economics, however, has illuminated the potential for development traps based on internal psychological phenomena. In this research, we address the subject of hope, which may form a key component to breaking cycles of poverty. Work in positive psychology by Snyder (1994) decomposes hope into aspirations, agency, and pathways. Operating in the context of an economic model developed with this framework, we review the literature on hope from psychology, philosophy, and theology, and its relationship to emerging work on aspirations in development economics. We then present one-month follow-up results from an experimental study based on a hope intervention in Oaxaca, Mexico among 601 indigenous women with access to microfinance loans. Our early experimental results suggest that the intervention raised aspirations approximately a quarter of a standard deviation, significantly raised a hope index among the treated subjects, and had positive but statistically insignificant results on enterprise revenues and profits. (pages 153 - 186)
This chapter is available at:
    University of Chicago Press

III. Imperfect and Incomplete Financial Markets

DOI: 10.7208/chicago/9780226574448.003.0005
[microfinance;asset grant;entrepreneurship;poverty trap]
Microfinancial interventions are designed as responses to poverty traps, where the poor cannot invest because they lack wealth, but poverty persists without investment. Interventions include microcredit programs, asset grants to micro-entrepreneurs, and small asset transfers to the very poor. We review the empirical evidence on such interventions, and assess our ability to account for this evidence using quantitative theory. At least three general lessons arise consistently. First, no policies produce large scale miracle escapes from poverty traps, that is, none has been shown to lead to permanent increases in income or consumption well beyond poverty levels nor to extended and sizable increases in the rate of growth of income, consumption, and capital that predict such escapes. Second, take-up rates for microcredit are typically low, while those of asset transfer programs are much higher. Third, heterogeneous responses to policies are evident in almost all studies, where impacts vary by initial wealth, size of intervention, gender, ability, entrepreneurial status, financial access, and time frame. (pages 189 - 222)
This chapter is available at:
    University of Chicago Press

DOI: 10.7208/chicago/9780226574448.003.0006
[cash transfers;micro-insurance;safety nets;poverty graduation;risk and vulnerability]
Progressively targeted cash transfers remain the dominant policy response to chronic poverty in developing countries. But are there alternative social protection policies that might have larger poverty impacts over time for the same public expenditure? To explore this question, this paper develops a dynamic stochastic model of consumption and asset accumulation by households that confront a non-convex production technology and missing financial markets. The model demonstrates that a hybrid social protection policy, which devotes resources to funding “state of the world contingent transfers” (SWCTs) to vulnerable, but non-poor households in the wake of negative shocks, can result in lower rates of poverty in the medium term than does a conventional cash transfer policy. We also explore the prospects for using subsidized index insurance as a way to implement SWCTs and find that an insurance-based hybrid policy can result in lower total public expenditures than a conventional cash transfer social protection program. (pages 223 - 262)
This chapter is available at:
    University of Chicago Press

IV. Dynamics and Resilience in Natural Resources and Agriculture

DOI: 10.7208/chicago/9780226574448.003.0007
[ability;drought;Ethiopia;pastoralists;poverty traps;shocks;wealth transfers]
We study the causal mechanisms behind persistent poverty. Some theoretical models combine non-convex technology with market failures to explain poverty traps, but do they exist in the data? One prominent strand of the empirical literature focuses on searching for a threshold associated with nonlinear growth that would lead to multiple equilibria, with one such equilibrium below a poverty line. Using original data on Boran pastoralists of southern Ethiopia where such a threshold has been previous identified, we find that nonlinear wealth dynamics arise purely due to shocks. In favorable states of nature, expected herd growth is linear and universal. We further show that ability to deal with shocks matters. Multiple stable equilibria characterize the wealth dynamics of herders of higher ability, while those with lower ability converge to a unique equilibrium at a small herd size. The result is a system in which multiple path dynamics are in play simultaneously for different subpopulations, each characterized by a different poverty trap mechanism. (pages 265 - 290)
This chapter is available at:
    University of Chicago Press

DOI: 10.7208/chicago/9780226574448.003.0008
[productivity;dynamics;response to shocks;resilience]
This paper investigates the nonlinear dynamic response to shocks, relying on a threshold quantile autoregression (TQAR) model as a flexible representation of stochastic dynamics. The TQAR model can identify zones of stability/instability and characterize resilience and traps. Resilience means high odds of escaping from undesirable zones of instability toward zones that are more desirable. Traps mean low odds of escaping from zones that are both undesirable and stable. The approach is illustrated in an application to the dynamics of productivity applied to historical data on wheat yield in Kansas over the period 1885-2012. The dynamics of this agroecosystem and its response to shocks are of interest as Kansas agriculture faced major droughts, including the catastrophic Dust Bowl of the 1930s. The analysis identifies a zone of instability in the presence of successive adverse shocks. It also finds evidence of resilience. We associate the resilience with induced innovations in management and policy in response to adverse shocks. (pages 291 - 322)
This chapter is available at:
    University of Chicago Press

V. Policy in the Presence of Poverty Trap Mechanisms

DOI: 10.7208/chicago/9780226574448.003.0009
[social interactions;leaders;human capital investments;randomized trial;impact evaluation;aspirations;conditional cash transfers]
Numerous evaluations show that conditional cash transfer programs change households’ investments in their young children, but there are many open questions about how such changes can be sustained after transfers end. This paper analyzes the role of social interactions with local female leaders for sustaining program impacts. The social interactions are identified through the randomized assignment of leaders and other beneficiaries to different cash transfer packages. Random exposure to leaders that received the largest package was found to augment short-term program impacts on households’ investments in education and nutrition, and to affect households’ attitudes towards the future during the intervention. This paper shows that the strong social multiplier effects from leaders’ treatment persisted two years after the end of the program. Households randomly exposed to female leaders with the largest package sustained higher investments in their children and reported higher expectations and aspirations for the future of their children. These results suggest that program design features that enhance ownership of a program’s objectives by local leaders may shift other beneficiaries’ norms and sustain higher levels of human capital investments. (pages 325 - 356)
This chapter is available at:
    University of Chicago Press

DOI: 10.7208/chicago/9780226574448.003.0010
[education;test scores;poverty;cash transfers;Ecuador]
Many poor households in developing countries are liquidity-constrained. As a result, they may under-invest in the human capital of their children. We provide new evidence on the long-term (10-year) effects of cash transfers using data from Ecuador. Our analysis is based on two separate sources of data and two identification strategies. First, we extend the results from an experiment that randomly assigned children under the age of 6 years to “early” or “late” treatment groups. Although the early treatment group received twice as much in total transfers, we find no difference between the two groups of children in performance on a large number of tests. Second, we use a regression discontinuity design exploiting the fact that a “poverty index” was used to determine eligibility for transfers. We focus on children who were just-eligible and just-ineligible for transfers when they were in late childhood, and compare their school attainment and work status 10 years later. Transfers increased secondary school completion, but the effects are small, between 1 and 2 percentage points from a counterfactual school completion rate of 75 percent. We conclude that any effect of cash transfers on the inter-generational transmission of poverty in Ecuador is likely to be modest. (pages 357 - 394)
This chapter is available at:
    University of Chicago Press


Author Index

Subject Index