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Poverty traps and intergenerational transfers

  • Luciano Fanti
  • Luca Spataro

In this paper, by adopting an OLG neoclassical growth model we show that intergenerational transfers may trigger the take off of an economy entrapped into poverty in a twofold way: 1) by eliminating the zero equilibrium -which, under technology with low factor substitutability, is always a "catching" point- so that the economy might start converging to a positive equilibrium. In this case the appropriate instrument turns out to be a transfer from the old to the young, while there is no room for policies redistributing in the opposite direction (i.e. a pay-as you-go-pension scheme); 2) when the rich equilibrium is unstable -which can be the case under high intertemporal substitution of individuals- the introduction of transfers may stabilize such an equilibrium, so that the economy starts converging to it. In the latter case both policy programs such as pay-as-you-go pension schemes or subsidies to the young may help escaping from poverty. However, we point out that in either circumstances, the "size" of transfers should be sufficiently large (and, as for pensions not even too large), in order to avoid ineffective and useless burden on the taxpayers without triggering the take off.

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File URL: http://www.ec.unipi.it/documents/Ricerca/papers/2007-66.pdf
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Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2007/66.

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Date of creation: 01 Jan 2007
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Handle: RePEc:pie:dsedps:2007/66
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  1. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  2. Galor, Oded, 1996. "Convergence? Inferences from Theoretical Models," Economic Journal, Royal Economic Society, vol. 106(437), pages 1056-69, July.
  3. Costas Azariadis, 1996. "The Economics of Poverty Traps Part One: Complete Markets," Working Papers 9606, Centro de Investigacion Economica, ITAM.
  4. Hoff, Karla & Sen, Arijit, 2005. "The kin system as a poverty trap?," Policy Research Working Paper Series 3575, The World Bank.
  5. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  6. repec:cup:cbooks:9780521001151 is not listed on IDEAS
  7. A. Prskawetz & G. Steinmann & G. Feichtinger, 2000. "Human capital, technological progress and the demographic transition," Mathematical Population Studies, Taylor & Francis Journals, vol. 7(4), pages 343-363.
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