Income Shocks and Poverty Traps: Asset Smoothing in Rural Ethiopia

Evidence is found of two distinct patterns of response to the onset of the recent drought in rural Ethiopia. Agricultural Households with pre-shock cattle holdings of three or more animals effectively used these assets as a buffer against the fall in agricultural income. In contrast, households with smaller herds preserved their current herd size, at the expense of reduced consumption. These results are consistent with the existence of a poverty trap in household cattle holdings, and highlight the stark choices faced by some groups during this period, to either reduce consumption today or potentially undermine productivity in the future.