The Economics of Asset Accumulation and Poverty Traps

June 28-29, 2016
Christopher B. Barrett of Cornell University; Michael Carter of University of California, Davis; and Jean-Paul Chavas of University of Wisconsin, Organizers

Mechanism 1: Nutrition, Health and Human Capital Formation

Duncan Thomas and Elizabeth Frankenberg, Duke University and NBER

Shocks and Nutrition, Health and Human Capital

Emma Boswell Dean and Heather Schofield, University of Pennsylvania, and Frank Schilbach, MIT and NBER

Poverty and Cognitive Function

Mechanism 2: Psychology of Poverty, Hope and Aspirations

Jonathan de Quidt, Institute for International Economic Studies, and Johannes Haushofer, Princeton University

Depression for Economists

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. In this paper, de Quidt and Haushofer present a simple model which predicts the core symptoms of depression from economic primitives, i.e. beliefs. Specifically, they show that when exogenous shocks cause an agent to have pessimistic beliefs about the returns to effort, this agent will exhibit depressive symptoms such undereating or overeating, insomnia or hypersomnia, and a decrease in labor supply. The researchers conclude by illustrating how depression might generate a poverty trap.

Travis Lybbert, University of California at Davis, and Bruce Wydick, University of San Francisco

Poverty, Aspirations, and the Economics of Hope: A Framework for Study with Preliminary Results from the Oaxaca Hope Project

Lybbert and Wydick create a framework for understanding the role of hope and aspirations in economic development and give preliminary experimental results from a field project in Oaxaca, Mexico carried out in this framework. They review the literature on hope from philosophy, theology, psychology, and its relationship to emerging work on aspirations in development economics. The researchers create an economic model of hope based on recent psychology literature that understands hope as a function of aspirations, agency, and pathways. Their model illustrates the role hope can play in the realization of positive effects from development interventions and how these effects emerge from interactions with the three constituent elements of hope. By clarifying definitions and relationships among these concepts and by leveraging relevant work from other disciplines, the researchers aim to create a framework within which economists can engage in rigorous empirical and experimental work that seeks to better understand the role of hope in economic development. The early experimental results suggest that a hope intervention among 601 microfinance borrowers 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 performance.

Mechanism 3: Imperfect and Incomplete Financial Markets

Francisco J. Buera, Federal Reserve Bank of Chicago; Joseph P. Kaboski, University of Notre Dame and NBER; and Yongseok Shin, Washington University in St. Louis and NBER

Taking Stock of the Evidence on Micro-Financial Interventions

Buera, Kaboski, and Shin review the empirical evidence on microfinance and asset grants to the ultra poor or microentrepreneurs, and assess their ability to account for this evidence using quantitative theory. Properly executed, these interventions can help segments of the population increase their income and consumption, but neither literature gives much reason to believe that such interventions can lead to wide-scale, transformative impacts akin to escaping aggregate poverty traps.

Michael Carter, Munenobu Ikegami, International Livestock Research Institute; and Christopher B. Barrett

Poverty Traps and the Social Protection Paradox

Progressively targeted food aid and cash transfers to the poorest of the poor remain the dominant responses to chronic poverty in developing countries. This paper uses a dynamic stochastic programming model of households that confront a non-convex production technology and missing financial markets to demonstrate the potentially large returns to an augmented social protection policy that establishes a productive safety net below vulnerable, but not indigent, households that keeps them from slipping into a poverty trap in the wake of a shock that would otherwise rob them of key productive assets. By mitigating the ex ante effects of risk and crowding in additional investment by vulnerable households, the productive safety net reduces the rate of unnecessary deprivation that occurs when agents able to attain a high-level equilibrium fail to do so for want of adequate capital. But if there simultaneously exists a subpopulation that is inevitably poor, then a tradeoff arises between allocating resources to progressively-targeted versus vulnerability-targeted social protection. Carter, Ikegami, and Barrett use this model to illustrate the tradeoffs among subpopulations and over time that arise from the use of different social protection mechanisms in societies where multiple poverty trap mechanisms co-exist.

Mechanism 4: Dynamics and Resilience in Natural Resources and Agriculture

Paulo Santos, Monash University, and Christopher B. Barrett

Heterogeneous Wealth Dynamics: The Role of Risk and Ability

This paper studies the causal mechanisms behind persistent poverty. Using original data on Boran pastoralists of southern Ethiopia, Santos and Barrett find that heterogeneous and nonlinear wealth dynamics arise purely in adverse states of nature. In favorable states, expected herd grow is quasi-linear and universal. The researchers further show that those with lower herding ability, as reflected in past herd growth data, converge to a unique equilibrium at a small herd size while those with higher ability exhibit multiple stable dynamic wealth equilibria.

Jean-Paul Chavas

Agro-Ecosystem Productivity and the Dynamic Response to Shocks

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 and stable. 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 1930's. The analysis identifies a zone of instability in the presence of successive adverse shocks. It also finds evidence of resilience. Chavas associates the resilience with induced innovations in management and policy in response to adverse shocks.

Policy in the Presence of Poverty Trap Mechanisms

Karen Macours, Paris School of Economics

Medium-term Impacts of a Productive Safety Net on Aspirations and Human Capital Investments

Macours and Vakis analyse the medium-term impacts of a productive safety net program and focus on the role of interactions with local leaders in sustaining poor households' investment response after the end of the program. The causal effect of social interactions is identified through the randomized assignment of leaders and other beneficiaries to three different interventions aimed at increasing human capital and productive investments. Social interactions were found to augment program impacts on households' investments in education and nutrition, and to affect households' attitudes towards the future during the intervention. This paper shows the social multiplier effects are instrumental in sustaining the shift in households' human capital investments even after the end of the program.

Norbert Schady, Caridade Araujo, and Mariano Bosch, Inter-American Development Bank

Cash Transfers and Poverty Traps: A Tale of Two Generations

Oriana Bandiera, Robin Burgess, and Munshi Sulaiman, London School of Economics; Narayan Das, BRAC University; Selim Gulesci, Bocconi University; and Imran Rasul, University College London

Labor Markets and Poverty in Village Economies

Bandiera, Burgess, Das, Gulesci, Rasul, and Sulaiman study how women's choices over labor activities in village economies correlate with poverty and whether enabling the poorest women to take on the activities of their richer counterparts can set them on a sustainable trajectory out of poverty. To do this the researchers conduct a large-scale randomized control trial, covering over 21,000 households in 1,309 villages surveyed four times over a seven year period, to evaluate a nationwide program in Bangladesh that transfers livestock assets and skills to the poorest women. At baseline, the poorest women mostly engage in low return and seasonal casual wage labor while wealthier women solely engage in livestock rearing. The program enables poor women to start engaging in livestock rearing, increasing their aggregate labor supply and earnings. This leads to asset accumulation (livestock, land and business assets) and poverty reduction, both accelerating after four and seven years. These gains do not come at the expense of others: non-eligibles' livestock rearing businesses are not crowded out and wages received for casual jobs increase as the poor reduce their labor supply in such labor activities. The authors' results show that: (i) the poor are able to take on the work activities of the non-poor but face barriers to doing so, and, (ii) one-off interventions that remove these barriers lead to sustainable poverty reduction.