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Short-lived shocks with long-lived impacts? - household income dynamics in a transition economy

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  • Lokshin, Michael
  • Ravallion, Martin

Abstract

In theory, it is possible that the persistent poverty that has emerged in many transition economies, is attributable to underlying, non-convexities in the dynamics of household incomes - such that a vulnerable household will never recover from a sufficiently large, but short-lived shock to its income. This happens when there are multiple equilibria in household incomes, such that two households with the same characteristics, can have different incomes in the long run. To test the theory, the authors estimate a dynamic, panel data model of household incomes, with non-linear dynamics, and endogenous attrition. Their estimates, using data for Hungary in the 1990s, exhibit non-linearity in the income dynamics. The authors find no evidence of multiple equilibria. In general, households bounce back from transient shocks, although the process is not rapid.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2459.

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Date of creation: 31 Oct 2000
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Handle: RePEc:wbk:wbrwps:2459

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Keywords: Health Economics&Finance; Economic Theory&Research; Labor Policies; Environmental Economics&Policies; Services&Transfers to Poor; Inequality; Environmental Economics&Policies; Economic Theory&Research; Health Economics&Finance; Services&Transfers to Poor;

References

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  1. Day, R H, 1992. "Complex Economic Dynamics: Obvious in History, Generic in Theory, Elusive in Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S9-23, Suppl. De.
  2. Varian, Hal R, 1979. "Catastrophe Theory and the Business Cycle," Economic Inquiry, Western Economic Association International, vol. 17(1), pages 14-28, January.
  3. Dasgupta, Partha & Ray, Debraj, 1986. "Inequality as a Determinant of Malnutrition and Unemployment: Theory," Economic Journal, Royal Economic Society, vol. 96(384), pages 1011-34, December.
  4. Azariadis, Costas, 1996. " The Economics of Poverty Traps: Part One: Complete Markets," Journal of Economic Growth, Springer, vol. 1(4), pages 449-96, December.
  5. Mroz, Thomas A., 1999. "Discrete factor approximations in simultaneous equation models: Estimating the impact of a dummy endogenous variable on a continuous outcome," Journal of Econometrics, Elsevier, vol. 92(2), pages 233-274, October.
  6. Stiglitz, Joseph E, 1976. "The Efficiency Wage Hypothesis, Surplus Labour, and the Distribution of Income in L.D.C.s," Oxford Economic Papers, Oxford University Press, vol. 28(2), pages 185-207, July.
  7. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
  8. Banerjee, Abhijit V & Newman, Andrew F, 1994. "Poverty, Incentives, and Development," American Economic Review, American Economic Association, vol. 84(2), pages 211-15, May.
  9. Bhargava, Alok & Sargan, J D, 1983. "Estimating Dynamic Random Effects Models from Panel Data Covering Short Time Periods," Econometrica, Econometric Society, vol. 51(6), pages 1635-59, November.
  10. Milanovic, Branko, 1995. "Poverty, inequality, and social policy in transition economies," Policy Research Working Paper Series 1530, The World Bank.
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Citations

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Cited by:
  1. Patricia Justino & Philip Verwimp, 2006. "Poverty Dynamics, Violent Conflict and Convergence in Rwanda," HiCN Working Papers 16, Households in Conflict Network.
  2. Patricia Justino, 2009. "The Impact of Armed Civil Conflict on Household Welfare and Policy Responses," HiCN Working Papers 61, Households in Conflict Network.
  3. Ayal Kimhi, 2004. "Growth, Inequality and Labor Markets in LDCs: A Survey," CESifo Working Paper Series 1281, CESifo Group Munich.
  4. Ravallion, Martin, 2001. "Growth, Inequality and Poverty: Looking Beyond Averages," World Development, Elsevier, vol. 29(11), pages 1803-1815, November.
  5. Stefan Dercon (QEH), . "Vulnerability: a micro perspective," QEH Working Papers qehwps149, Queen Elizabeth House, University of Oxford.
  6. Dercon, Stefan & Hoddinott, John, 2003. "Health, Shocks and Poverty Persistence," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  7. Rodriguez-Meza, Jorge & Gonzalez-Vega, Claudio, 2004. "Household Income Dynamics And Poverty Traps In Rural El Salvador," 2004 Annual meeting, August 1-4, Denver, CO 20352, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. Stefan Dercon, 2004. "Growth and Shocks: evidence from rural Ethiopia," Development and Comp Systems 0409036, EconWPA.
  9. Zsuzsa Kapitany & Gyorgy Molnar, 2002. "Inequality and mobility analysis by the Hungarian Rotation Panel, 1993-98," IEHAS Discussion Papers 0204, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  10. Stefan Dercon (QEH), . "Risk, Growth and Poverty: what do we know, what do we need to know?," QEH Working Papers qehwps148, Queen Elizabeth House, University of Oxford.
  11. Pierre-Richard Agenor, 2002. "Business Cycles, Economic Crises, and the Poor," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 5(3), pages 145-160.
  12. Agenor, Pierre-Richard, 2001. "Business cycles, economic crises, and the poor : testing for asymmetric effects," Policy Research Working Paper Series 2700, The World Bank.

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