Well-being dynamics and poverty traps

Abstract

A sound understanding of poverty traps-defined as poverty that is self-reinforcing due to the poor's equilibrium behaviors-and their underlying mechanisms is fundamentally important to the development of policies and interventions targeted to assist the poor. We review the theoretical and empirical evidence on single equilibrium and multiple equilibria poverty traps at the macro-, meso-, and, especially, microlevels. In addition we review the literature exploring the various mechanisms that have been posited to perpetuate poverty. We find sufficient evidence to support the poverty traps hypothesis, suggesting that policies designed to interrupt those self-perpetuating mechanisms merit serious attention.