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Persistent poverty and informal credit

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Author Info

  • Santos, Paulo
  • Barrett, Christopher B.

Abstract

This paper explores the consequences of nonlinear wealth dynamics for the formation of bilateral credit arrangements to help manage idiosyncratic risk. Using original data on expected wealth dynamics, social networks and informal loans among southern Ethiopian pastoralist households, we find that the threshold at which expected wealth dynamics bifurcate serves as a focal point at which lending is concentrated. Informal lending responds to recipients' losses but only so long as the recipients are not "too poor". Our results suggest that when shocks can have long term effects, loans are best understood as providing a safety net rather than a scale-neutral insurance mechanism. Furthermore, the persistently poor are excluded from social networks that are necessary to obtain loans given in response to shocks.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 96 (2011)
Issue (Month): 2 (November)
Pages: 337-347

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Handle: RePEc:eee:deveco:v:96:y:2011:i:2:p:337-347

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Poverty dynamics Informal credit Social networks Ethiopia;

References

References listed on IDEAS
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Citations

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Cited by:
  1. Carter, Michael R. & Lybbert, Travis J., 2012. "Consumption versus asset smoothing: testing the implications of poverty trap theory in Burkina Faso," Journal of Development Economics, Elsevier, vol. 99(2), pages 255-264.
  2. Sommarat Chantarat & Andrew G. Mude & Christopher B. Barrett & Michael R. Carter, 2013. "Designing Index-Based Livestock Insurance for Managing Asset Risk in Northern Kenya," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(1), pages 205-237, 03.
  3. Tache, Boku & Sjaastad, Espen, 2010. "Pastoralists' Conceptions of Poverty: An Analysis of Traditional and Conventional Indicators from Borana, Ethiopia," World Development, Elsevier, vol. 38(8), pages 1168-1178, August.
  4. Chantarat, Sommarat & Barrett, Christopher B., 2007. "Social Network Capital, Economic Mobility and Poverty Traps," MPRA Paper 1947, University Library of Munich, Germany.
  5. Kraay, Aart & McKenzie, David, 2014. "Do poverty traps exist ?," Policy Research Working Paper Series 6835, The World Bank.
  6. Janzen, Sarah A. & Carter, Michael R. & Ikegami, Munenobu, 2012. "Valuing Asset Insurance in the Presence of Poverty Traps: A Dynamic Approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124805, Agricultural and Applied Economics Association.
  7. Janzen, Sarah A. & Carter, Michael R., 2013. "The Impact of Microinsurance on Consumption Smoothing and Asset Protection: Evidence from a Drought in Kenya," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151141, Agricultural and Applied Economics Association.

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