Why Do People Stay Poor?

Abstract: There are two broad views as to why people stay poor. One emphasizes differences in fundamentals, such as ability, talent or motivation. The other, poverty traps view, differences in opportunities which stem from differences in wealth. We exploit a large-scale, randomizedasset transfer and panel data on 6000 households over an 11 year period to test betweenthese two views. The data supports the poverty traps view - we identify a threshold level ofinitial assets above which households accumulate assets, take on better occupations and growout of poverty. The reverse happens for those below the threshold. Structural estimationof an occupational choice model reveals that almost all beneficiaries are misallocated in thework they do at baseline and that the gains arising from eliminating misallocation would farexceed the program costs. Our findings imply that big push policies which transform jobopportunities represent a powerful means of addressing the global mass poverty problem.

Please contact Alison Andrew from the IFS for the seminar link at alison_a@ifs.org.uk.