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Heterogeneous Wealth Dynamics On the Roles of Risk and Ability

Heterogeneous Wealth Dynamics On the Roles of Risk and Ability

Chapter:
(p.265) 7 Heterogeneous Wealth Dynamics On the Roles of Risk and Ability
Source:
The Economics of Poverty Traps
Author(s):
Paulo SantosChristopher B. Barrett
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226574448.003.0011

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.

Keywords:   ability, drought, Ethiopia, pastoralists, poverty traps, shocks, wealth transfers

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