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The Microeconomics of Poverty Traps in Mexico

  • Jean-Paul Chavas
  • Hector J. Villarreal

Macroeconomists, development scholars, and policy makers have long recognized the importance of poverty traps as a mayor cause of persistent inequality and a serious limitation to growth. A poverty trap may be defined as a threshold level below which individuals or households will not increase their well-being despite the conditions of the economy. While the importance of poverty traps is widely accepted, their microfoundations (the rationality) behind them are not very well understood. Under the Mexican setting, this paper contributes in two ways. First, we assume that income depends on the capital (both physical and human) that a household posses. Hence, if a household is poor and it is not able to accumulate capital it will remain poor (unless there is a sudden increase to the returns of its existing capital). Thus a poverty trap will be generated. Following Chavas (2004, 2005) we explicitly model the preferences, consumption, and the physical and human capital accumulation of Mexican households. We argue that the typical dynamic model with additive utilities and constant discount rates will not be able to capture poverty traps. The reason is that survival motives are involved (endogenous discounting is needed). Second, employing the same model, we test the impact of the Mexican government most important social policy program (Progresa-Oportunidades), in alleviating poverty traps. In the case of households with youngsters, this program can provide funds conditioned on kids attending school. This will somehow, force the participants to increase their human capital. A comparison between households in the programs versus non participants should shed some light in the effectiveness of the program and the sensitivity of persistent poverty to cash transfers.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c010_050.

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Length: 14 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:deg:conpap:c010_050
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  1. Streufert, Peter A., 1992. "An abstract topological approach to dynamic programming," Journal of Mathematical Economics, Elsevier, vol. 21(1), pages 59-88.
  2. Emmanuel Skoufias & Susan Wendy Parker, 2001. "Conditional Cash Transfers and Their Impact on Child Work and Schooling: Evidence from the PROGRESA Program in Mexico," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  3. Brian W. Gould, 2003. "An Empirical Assessment of Endogeneity Issues in Demand Analysis for Differentiated Products," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 605-617.
  4. Streufert, Peter A, 1990. "Stationary Recursive Utility and Dynamic Programming under the Assumption of Biconvergence," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 79-97, January.
  5. Sadoulet, Elisabeth & Janvry, Alain de & Davis, Benjamin, 2001. "Cash Transfer Programs with Income Multipliers: PROCAMPO in Mexico," World Development, Elsevier, vol. 29(6), pages 1043-1056, June.
  6. J. Scott Shonkwiler & Steven T. Yen, 1999. "Two-Step Estimation of a Censored System of Equations," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 972-982.
  7. Paul Schultz, T., 2004. "School subsidies for the poor: evaluating the Mexican Progresa poverty program," Journal of Development Economics, Elsevier, vol. 74(1), pages 199-250, June.
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