Transitioning out of poverty

Abstract

We analyze the role of social environment and human capital formation in persistence of poverty and inequality. We present a Romer type variety model where the presence of economies of agglomeration in social environment may cause two basins of attraction; whereby we may interpret the lower basin as a poverty trap and the upper basin as a take-off region. We then consider the size of income transfer to regions and its effect on inequality and welfare. We provide supporting evidence of existing inequality and poverty trap using educational attainment data for the USA. © 2009 Blackwell Publishing Ltd.