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Poverty traps and nonlinear income dynamics with measurement error and individual heterogeneity

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  • Antman, Francisca
  • McKenzie, David J.

Abstract

Theories of poverty traps stand in sharp contrast to the view that anybody can make it through hard work and thrift. However, empirical detection of poverty traps is complicated by the lack of long panels, measurement error, and attrition. This paper shows how dynamic pseudo-panel methods can overcome these difficulties, allowing estimation of non-linear income dynamics and testing for the presence of poverty traps. The paper explicitly allows for individual heterogeneity in income dynamics to account for the possibility that particular groups of individuals may face traps, even if the average individual does not. These methods are used to examine the evidence for a poverty trap in labor earnings, income, and expenditure in Mexico and are compared to panel data estimates from a short rotating panel. The results do find evidence of nonlinearities in household income dynamics and demonstrate large bias in the panel data estimates. Nevertheless, even after allowing for heterogeneity and accounting for measurement error, the paper finds no evidence of the existence of a poverty trap for any group in the sample.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3764.

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Date of creation: 01 Nov 2005
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Handle: RePEc:wbk:wbrwps:3764

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Keywords: Inequality; Services&Transfers to Poor; Economic Theory&Research; Economic Conditions and Volatility; Poverty Monitoring&Analysis;

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  2. McKenzie, David J & Woodruff, Christopher, 2006. "Do Entry Costs Provide an Empirical Basis for Poverty Traps? Evidence from Mexican Microenterprises," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 55(1), pages 3-42, October.
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  7. Francisca Antman & David J. McKenzie, 2007. "Earnings Mobility and Measurement Error: A Pseudo-Panel Approach," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 56, pages 125-161.
  8. Jalan, Jyotsna & Ravallion, Martin, 2001. "Household income dynamics in rural China," Policy Research Working Paper Series, The World Bank 2706, The World Bank.
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  17. Dasgupta, Partha & Ray, Debraj, 1986. "Inequality as a Determinant of Malnutrition and Unemployment: Theory," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 96(384), pages 1011-34, December.
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