erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Escaping from the Poverty Trap

Bac Van Luu (University of Birmingham, UK)

Abstract  

Economists have long been fascinated by the concept of the poverty trap, by which we usually mean the lower level equilibrium in models with multiple equilibria. The fascination with the concept stems from the fact that understanding the reasons for the poverty trap could give indications as to how to overcome it to attain the high level equilibrium. We study the emergence of a low development trap in a growth model with endogenous fertility and human capital investments. Parents spend their time rearing and educating their offspring the latter of which is the source of growth in the model. Children inherit the previous generation's average level of human capital. This intergenerational externality prevents some agents from investing in their children's education. If the parent's human capital falls below a threshold value the return on the quantity of children will always exceed the return on child quality. Various economic policies aimed at pushing the economy out of the poverty equilibrium are considered, such as a child tax, education subsidy, and intergenerational transfers. Introducing consumer heterogeneity facilitates the analysis of income distribution and redistributional policies. The relationship between income inequality and growth is shown to be similar to the Kuznets curve phenomenon. In early stages of development, inequality is good for economic growth as only a certain concentration of wealth can overcome the quasi-indivisibility in human capital investment. As the economy develops, however, inequality decreases over time and vanishes.

Economic Research Center
Middle East Technical University
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