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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

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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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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;

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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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
  7. Costas Azariadis, 1996. "The Economics of Poverty Traps Part One: Complete Markets," Working Papers 9606, Centro de Investigacion Economica, ITAM.
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  8. Varian, Hal R, 1979. "Catastrophe Theory and the Business Cycle," Economic Inquiry, Oxford University Press, vol. 17(1), pages 14-28, January.
  9. Banerjee, Abhijit V & Newman, Andrew F, 1994. "Poverty, Incentives, and Development," American Economic Review, American Economic Association, vol. 84(2), pages 211-15, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stefan Dercon, 2004. "Growth and Shocks: evidence from rural Ethiopia," Development and Comp Systems 0409036, EconWPA. [Downloadable!]
    Other versions:
  2. Stefan Dercon (QEH), . "Vulnerability: a micro perspective," QEH Working Papers qehwps149, Queen Elizabeth House, University of Oxford. [Downloadable!]
  3. 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. [Downloadable!]
  4. PIERRE-RICHARD AGÉNOR, 2002. "Business Cycles, Economic Crises, and the Poor," Journal of Policy Reform, Taylor and Francis Journals, vol. 5(3), pages 145-160, September. [Downloadable!] (restricted)
  5. Ravallion, Martin, 2001. "Growth, inequality, and poverty : looking beyond averages," Policy Research Working Paper Series 2558, The World Bank. [Downloadable!]
    Other versions:
  6. Patricia Justino, 2009. "The Impact of Armed Civil Conflict on Household Welfare and Policy Responses," Research Working Papers 12, MICROCON - A Micro Level Analysis of Violent Conflict. [Downloadable!]
  7. Zsuzsa Kapitany & Gyorgy Molnar, 2002. "Inequality and mobility analysis by the Hungarian Rotation Panel, 1993-98," IEHAS Discussion Papers 0204, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
  8. Patricia Justino & Philip Verwimp, 2006. "Poverty Dynamics, Violent Conflict and Convergence in Rwanda," HiCN Working Papers 16, Households in Conflict Network. [Downloadable!]
    Other versions:
  9. Agenor, Pierre-Richard, 2001. "Business cycles, economic crises, and the poor : testing for asymmetric effects," Policy Research Working Paper Series 2700, The World Bank. [Downloadable!]
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