The Economics of Poverty Traps and Persistent Poverty: Empirical and Policy Implications

The moral and economic imperatives to intervene in poverty traps motivate the identification of poverty traps and their structural causes so as to inform the design of appropriate policy responses. However, empirical identification remains challenging because of poverty traps’ complexity. After reviewing mechanisms that can generate poverty traps, we focus on one – multiple financial market failures – emphasising its heretofore underappreciated testable implications, including specific behaviours that are rational only in the presence of a poverty trap. We therefore recommend tests for these behaviours rather than more econometrically challenged efforts to directly test for poverty traps in estimated asset dynamics.