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Escaping Poverty: Risk-Taking and Endogenous Inequality in a Model of Equilibrium Growth

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  • Michael A. Sadler

    (Kansas State University)

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    Abstract

    Recent macroeconomic models of income distribution generate equilibria characterized as poverty traps. These models specify a production indivisibility such that, due to problems of asymmetric information in credit or capital markets, poor agents are never able to acquire the resources necessary to overcome the indivisibility. In the context of an equilibrium growth model, this paper demonstrates that faced with such constraints, poor, risk-averse agents have incentives to voluntarily take on risk in the hopes of exiting poverty. Each period they remain in poverty, they sacrifice a small amount of current consumption to pool resources for this risky activity. Risk-taking, economic mobility, and the distribution of income are generated endogenously. Furthermore, beginning from identical endowments, "initial" inequality also emerges endogenously. It is shown that voluntary risk-taking eliminates many potential steady-state equilibria of this and other models -- those that exhibit individual poverty traps. All agents (or dynasties) expect to escape at some future date, after a perhaps extended spell in poverty. (Copyright: Elsevier)

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    File URL: http://dx.doi.org/10.1006/redy.1999.0088
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    Bibliographic Info

    Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

    Volume (Year): 3 (2000)
    Issue (Month): 4 (October)
    Pages: 704-725

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    Handle: RePEc:red:issued:v:3:y:2000:i:4:p:704-725

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    Cited by:
    1. Lehmann, Erik E. & Warning, Susanne, 2003. "The impact of gender on individual decisions: Evidence from the "Millionaire Show"," Discussion Papers, Series 1 325, University of Konstanz, Department of Economics.

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