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Oriana Bandiera
with Clare Balboni, Robin Burgess, Maitreesh Ghatak and Anton Heil
LSE
Why do people stay poor?
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Poverty has been decreasing but is still high in SSA and SA
397.6 mio
335.6 mio3.0 mio
26.8 mio3.3 mio2.3 mio
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These are the regions where population growth will be fastest
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Need to address the “stubborn poverty” problem: a lot of poor people are left behind even as countries grow.
We need to understand why people stay poor in order to design policies that lift the poorest out of poverty
Eradicate extreme poverty by 2030 (SDG1)?
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Consumption
Earnings
Transfers
Poverty: consumption below poverty line
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Consumption
Earnings
Transfers
Policy tools tackle one of the two components
Policy tools
training, credit, transfers
social assistance/protection
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Most countries spend a large % of GDP in social protection
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But expenditure per capita is lowest in the poorest regions
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Policies aim to improve productivity within occupation & access to better occupations via
credit
training
grants
We need to understand why people stay poor to assess whether these programs can be effective
Can we increase labor earnings instead?
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Two views of why people stay poor
Equal access to opportunity, different traits
Unequal access to opportunity, same traits
• People have different innate traits which determine their standard of living
• People have different access to opportunity which determines their standards of living
• Initial endowments do not matter, allocation of talent is efficient
• Initial endowments matter, talent is misallocated
➔ Social protection programs ➔ Large asset/skill transfers
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1. Use theory to illustrate how response to exogenous shock to capital can be used to test between the two views of poverty
2. Implement test using RCT in Bangladesh (Bandiera et al., 2017) tracking 23k HHs across wealth distribution over 7 years
3. Inform the design of policies for poverty reduction
This lecture
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Setting
Setting
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Study site map
Mongaregion: a lack of demand for casual wage labor, higher grain prices, extreme poverty and food insecurity
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23K households surveyed 4 times (07,09,11,14)
labor market activities
productive assets
4 wealth classes, ranked by the community
Data
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Three jobs account for most hours worked & occupation is correlated with wealth class
DomesticMaid
Livestock rearing
(cows/goats)
Agriculture day labor
Other
Ultra Poor Near Poor Middle Class Upper Class
Share of time devoted to different occupations
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Wage labor is uncertain, seasonal and pays less per hour
Occupation correlated with ownership of productive assets (k): livestock, business assets (rickshaws, boats, sheds, agricultural machinery etc.) and land
Asset holdings stable through time
In this setting, physical capital is likely to drive any potential trap, in other settings it might be human capital
Jobs
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The poor have fewer assets and don’t accumulate over timeLog p
roductive a
ssets
in 0
7,0
9,1
1
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Setting
Framework
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Make precise the assumptions underpinning the two views of why people stay poor
Equal access to opportunity, different traits
Unequal access to opportunity, same traits
• People have different innate traits which determine their standard of living
• People have different access to opportunity which determinestheir standards of living
• DRS to factors that can be accumulated
• IRS to factors that can be accumulated
• Perfect credit markets • Imperfect credit markets
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Each person 𝑖 is born with one unit of time, wealth endowment 𝐸𝑖 and talent 𝐴𝑖𝑗 for occupation j = 1,2
1 is wage labor, pays 𝑤
2 is livestock rearing, requires capital 𝐾 and yields 𝐴𝑖2𝑓(𝐾)
Assume 𝐴𝑖1 = 1 for all i’s, 𝐴𝑖2 can differ among people, call it 𝐴𝑖
to simplify
Occupational choice under the two views
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• Everybody faces the same cost of capital 𝑟, 𝑓(𝐾) is concave
• Individual i chooses 𝐾∗ to maximise
𝐴𝑖𝑓 𝐾𝑖 − 𝑟𝐾𝑖 𝑠. 𝑡. 𝐾𝑖 ≥ 0
• This yields the standard FOC
𝐴𝑖𝑓′ 𝐾𝑖
∗ = 𝑟
• threshold 𝐴∗ s.t.
• 𝐴𝑖 < 𝐴∗ choose 𝐾∗ = 0
• 𝐴𝑖 > 𝐴∗ choose 𝐾𝑖∗> 0 , increasing in 𝐴𝑖
• Endowments do not matter (with perfect credit markets non-convexities can be overcome by borrowing)
• All individuals with 𝐾𝑖 = 0 have 𝐴 < 𝐴∗
•
Perfect credit markets +DRS equal opportunities
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0
𝑦 = max{𝑤, 𝐴𝑓 𝑘 }
𝑦 = 𝑤
Kk(A*)
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• Without credit markets individual 𝑖 chooses 𝐾∗, to maximise
𝐴𝑖𝑓 𝐾𝑖 − 𝑟𝐾𝑖 𝑠. 𝑡. 𝐸𝑖 ≥ 𝐾𝑖 ≥ 0
• Now 𝐴𝑖𝑓′ 𝐾𝑖 − 𝑟 = 0 𝑓𝑜𝑟 𝐾𝑖∗ < 𝐸𝑖 and 𝐴𝑖𝑓′ 𝐾𝑖 − 𝑟 >
0 𝑓𝑜𝑟 𝐾𝑖∗ > 𝐸𝑖
• In a model with savings, individuals can save their way out of poverty as small investments at low K have high returns
• That is, as long as f(.) is concave, credit market imperfections cannot generate a trap
No credit markets poverty trap?
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0
𝑦 = max{𝑤, 𝐴𝑓 𝑘 }
𝑦 = 𝑤
y
K
IRS at low K increase the minimum viable scale
k(A*) k(A*)
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• We now have two groups of people for given talent A:
• those for whom 𝐸𝑖 > 𝐾(𝐴𝑖∗) same as in previous world
• those for whom 𝐸𝑖 < 𝐾(𝐴𝑖∗) stuck in low earnings occupation,
𝐾 = 0
endowments matter
some people with 𝐾 = 0 actually have 𝐴 > 𝐴∗
No credit markets + convexity poverty trap
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Setting
Test
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K shock: Asset transfer worth 1 year of PCE
4k HHs received the program at the same time
By design all get a package of similar value
But they start with different assets at baseline
We use BRAC’s Targeting the Ultrapoor Program
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tk
1tk
tt kk 1
𝑘0𝐴
𝑘𝑡+1 = 𝑠𝐴𝑓 𝑘𝑡 + 1 − 𝛿 𝑘𝑡
𝑘0𝐵
ΔΔ
• Compare person A with person B
• Both receive transfer of size ∆
• Transfer sends A below and B above 𝑘
• A reverts back towards low steady state, 𝑘𝐿
• B escapes poverty and ends up at high steady state, 𝑘𝐻
𝑘 𝑘𝐻𝑘𝐿
We test the joint H0 that (i) there is a threshold and (ii) the program pushes some above and leaves others below
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Preliminary evidence
2 years after the transfer
4 years after the transfer
7 years after the transfer
k
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Level of k such that those below fall back into poverty and those above escape
This is identified by:
estimating the transition equation for K
finding the point, if any where it crosses the 45 line from below
Note: this estimates an average threshold
In progress: structural estimates of individual thresholds
Identifying the threshold
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tk
1tk
tt kk 1
𝑘0𝐴
𝑘𝑡+1 = 𝑠𝐴𝑓 𝑘𝑡 + 1 − 𝛿 𝑘𝑡
𝑘0𝐵
ΔΔ
𝑘 𝑘𝐻𝑘𝐿
The transition equation
find this point
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Non-parametric identification
𝒌=2.34
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Parametric identification
𝒌=2.34
𝒌=2.36
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Identification exploits differences in baseline assets
These could be correlated with
1. traits –e.g. talent- that determine the return to K
- the estimated k^ is an average of different thresholds
- no guarantee that people below it would be able to escape poverty had they been given enough
2. shocks that drive capital accumulation
Is this really a poverty trap?
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We present four tests to assess whether the patterns we observe can be explained by shocks or differences in talent/preferences correlated with baseline assets
Four tests
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Setting
1. Missing Mass Test
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Missing mass around the threshold in CONTROL villages
𝒌=2.34
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But A is unimodal
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2. Sorting test
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0
𝑤
y
Kk_l k_h
2 types of k0: low and high
4 As in each type
before transfer both types are in wage labor
after the transfer, only the brightest of low (A4) but almost all of the high move to livestock
y(A1)
y(A2)
y(A3)y(A4)
k_l+Tk_h+T
Sorting when A is uncorrelated with k0
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0
𝑦 = 𝑤
y
Kk_l k_h
2 types of k0: low and high
low has A1-2, high has A3-4
before transfer both types are in wage labor
after the transfer, none of the low but all of the high types move to livestock
A1
A2
A3A4
k_l+T k_h+T
Sorting when A is correlated with k0
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Implications of cov(k0,A)=0 (vs cov(k0,A)>0)
1. The number of switchers is monotonically increasing in k (flat with a discrete jump)
2. The average A for switchers is decreasing in k0 (increasing)
3. The max A for switchers is decreasing in k0 (increasing)
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1. Number of switchers is monotonically increasing
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2. Average productivity of switchers is decreasing
baseline assets (k0)
ho
url
y r
etu
rns to
liv
esto
ck
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3. Max productivity of switchers is not increasing
baseline assets (k0)
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Implications of cov(k0,A)=0 (vs cov(k0,A)>0)
1. The number of switchers is monotonically increasing in k (flat with a discrete jump) ✔
2. The average A for switchers is decreasing in k0 (increasing)✔
3. The max A for switchers is decreasing in k0 (increasing) ✔
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Setting
3. Responses to K transfer test
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tk
1tk
0
tt kk 1
Δ
𝑘0𝐴 𝑘0
𝐴 + Δ 𝑘0𝐵 + Δ
𝑘𝑡+1 = 𝑠𝐴𝑓 𝑘𝑡 + 1 − 𝛿 𝑘𝑡
𝑘∗
Δ1𝐴 > 0
𝑘1𝐴
Δ
𝑘1𝐵 𝑘0
𝐵
Δ1𝐵 < 0
Δ
Δ1
Transfer (by design the same)
Change after Transfer(Varies depending on 𝑘0)
Δ
Response to asset transfer in equal opportunity view
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0
Δ1
𝑘𝑡𝑘∗
Response to asset transfer in equal opportunity view
poorer people more likely to accumulate K
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tk
1tk
0
tt kk 1
𝑘0𝐴
𝑘𝑡+1 = 𝑠𝐴𝑓 𝑘𝑡 + 1 − 𝛿 𝑘𝑡
𝑘𝑘0𝐵
𝑘0𝐶 = 𝑘∗
ΔΔΔ
Response to asset transfer in unequal opportunity view
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0
Δ1
𝑘t𝑘𝐻𝑘𝑘𝐿
Response to asset transfer in unequal opportunity view
poorer people less likely to accumulate K
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Response to asset transfer in data
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𝒌
People below 𝑘 lose assets an an increasing rate
People above 𝑘accumulate more assets, at a decreasing rate
Ch
an
ge
in
asse
ts (
20
07
-20
11
)
Productive assets (k) in 2007 +transfer
Response to asset transfer in data, allowing for discontinuty
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Setting
Shocks?
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If controls are in steady state, any changes in assets must be due to shocks we use data from controls
1. to test whether shocks can explain the pattern of asset accumulation we see in treatment
2. to adjust for shocks
Measuring shocks
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Shocks (blue) cannot explain the distribution of changes in treatment (red)
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We rank beneficiaries by their assets+transfer value
We compute the average shock of controls at similar levels of assets (20 windows)
Under the assumption that people with similar asset value receive similar shocks we can use shocks experienced by controls to adjust the beneficiaries’ responses
Adjust for shocks
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Changes in assets with shock adjustment (green)
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Setting
4. Changes in observed traits around the threshold
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7500
80
00
85
00
90
00
9500
Per-
adult e
quiv
ale
nt annua
l fo
od e
xp
en
diture
at base
lin
e
2.2 2.4 2.6 2.8 3capital at baseline
Sample restricted to 3390 treated ultra-poorThreshold at 2.344.
Per-adult equivalent annual food expenditure
Nutrition
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Human capital
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Behavioral 1: impatience
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Behavioral 1: impatience
Suppose you have won 200 taka in a game. You can get this 200 taka today or get 250 taka instead in one month. Which one would you prefer?1) 200 taka today2) 250 taka in one month
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Behavioral 2: risk aversion
Which payoff would you prefer?
1) 100 for winning, 100 for losing
2) 200 for winning, 60 for losing
3) 300 for winning, 20 for losing
4) 400 for winning, 0 for losing
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Setting
Mechanisms
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Why can’t the poor get past 𝑘 on their own?
Recall: need IRS and no credit markets
We know they cannot borrow and that they have negligible savings
Evidence for IRS: fixed factors/ indivisibilities
Technology
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Asset composition differs: fewer chickens
20% DROP
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More business assets (esp rickshaws and boats)
20% HIKE
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Beneficiaries who do not start with complementary inputs regress back to poverty despite the large transfers
Those who do are elevated above the threshold and set on a sustainable path out of poverty
They save and invest year after year
They diversify into assets (e.g. land) that were not transferred by the program
Taking stock
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Setting
Policy
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The existence of a poverty threshold implies that only transfers large enough to push beneficiaries past the threshold will reduce poverty in the long run
Smaller transfers might increase consumption for a short period but will have no long lasting effects
BRAC asset transfer worth $515 (.88 of PCE) was enough for 66% of beneficiaries
Micro-loans are typically <$200
Policy implications
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Microfinance is cheap (even profitable) but ineffective at allowing access to more remunerative occupations (Meager 18, Banerjee et al 15)
Vocational training programs typically have low take up if not they are effective, but expensive (McKenzie 17, Alfonsi et al 18)
Large assets & cash grants are effective at promoting occupational change, but expensive (Banerjee et al 15, Blattman et al 14,16, Bandiera et al
17)
The evidence in one slide
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A big problem requires a big solution
𝑘
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A big problem requires a big solution
𝑘
Alternative Policies:
Mic
rolo
an
1
00
$ P
PP
Mic
rolo
an
2
00
$ P
PP
NR
EG
A
Pe
ru*
Ind
ia*
Gh
an
a*
Pa
kis
tan
*
Hon
du
ras*
Bla
ttm
an
et a
l. (
20
14
)
* Country names refer to study sites in Banerjee et al. (2015)
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thank you