Theories of poverty traps and anti-poverty policies

Abstract

In this paper we provide a conceptual overview of alternative mechanisms leading to poverty traps at the individual level, making a distinction between those that are due to external frictions (e.g., market failure), and those that are due to behavior under extreme scarcity in the absence of any frictions. We develop a common theoretical framework to examine alternative scenarios, characterizing conditions under which poverty traps (in the sense of multiple stable steady states) arise, as opposed to (possibly, conditional) convergence to a unique steady state. We apply this framework to discuss the relative merits of alternative anti-poverty policies, such as unconditional and conditional cash transfers, and direct interventions aimed at improving market access to the poor or improving public service delivery.