Why Do People Stay Poor?

There are two broad views as to why people stay poor. One emphasizes differences in fundamentals, such as ability, talent, or motivation. The other, the poverty traps view, emphasizes differences in opportunities which stem from access to wealth. To test between these two views, we exploit a large-scale, randomized asset transfer and an 11-year panel of 6,000 households who begin in extreme poverty. The setting is rural Bangladesh and the assets are cows. The data supports the poverty traps view—we identify a threshold level of initial assets above which households accumulate assets, take on better occupations (from casual labor in agriculture or domestic services to running small livestock businesses), and grow out of poverty. The reverse happens for those below the threshold. Structural estimation of an occupational choice model reveals that almost all beneficiaries are misallocated in the work they do at baseline and that the gains arising from eliminating misallocation would far exceed the program costs. Our findings imply that large transfers which create better jobs for the poor are an effective means of getting people out of poverty traps and reducing global poverty.

Energy poverty and its relationship with health: empirical evidence on the dynamics of energy poverty and poor health in Australia

Does poor health increase the likelihood of energy poverty or vice versa creating a vicious poverty trap? We use data from the Household, Income and Labour Dynamics of Australia (HILDA) survey from 2005–2018 to explore if these two processes are dynamically related across a number of subjective and objective measures of physical and mental health as well as subjective and objective measures of energy poverty. We employ univariate dynamic models, introduce controls for initial conditions, and explore inter-dependence between energy poverty and health using a dynamic bivariate probit model. Our results show that controlling for initial conditions impacts on the magnitude and significance of the lagged coefficients. We only find cross-dependency effects between energy poverty and health for subjective measures of energy poverty. This suggests that individuals’ feelings about being in energy poverty may impact on their health leading to poor health/energy poverty traps. Targeting individuals in financial stress/debt may be one way to reduce these poor health/energy poverty traps.

Poverty traps across levels of aggregation

Poverty trap studies help explain the simultaneous escape from poverty by some households and regions alongside deep and persistent poverty elsewhere. However, researchers remain divided about how important poverty traps are in explaining the range of poverty dynamics observed in various contexts. We build a theoretical model that integrates micro-, meso-, and macro-level poverty traps, allowing us to analyze the ways in which multiple layers of poverty traps interact and reinforce each other. Through this simulation model, markets and institutions arise endogenously and help certain individuals escape poverty, while others remain persistently poor. In addition to one’s own productivity and initial capital levels, we explore how individual opportunity and income can be heavily determined by market access and institutional factors beyond one’s control. Using simulation results from controlled experiments, we can identify the role played by meso- and macro-conditions (that correspond to local markets and country-wide institutions, respectively) in helping individuals escape poverty. Our results suggest that even in a parsimonious model—with optimizing, forward-looking agents operating in a world with only one trap at each level—local and national context matters immensely and combines to determine individual opportunity in complex ways.