Discussion paper

DP14534 Why do people stay poor?

There are two broad views as to why people stay poor. One emphasizes the role of economic fundamentals - for example, differences in individual traits like talent or motivation make the poor choose low productivity jobs. The other, the poverty traps view, emphasizes that access to opportunities
depends on initial wealth and hence poor people have no choice but to work in low productivity jobs. We test the two views using the random allocation of
an asset transfer program that gave some of the poorest women in Bangladesh access to the same job opportunities as their wealthier counterparts
in the same villages. The data rejects the null of equal opportunities. Exploiting small variation in initial endowments, we estimate the transition equation and find that, if the program pushes individuals above a threshold level of initial assets, then they escape poverty, but, if it does not, they slide back into poverty. Structural estimation of an occupational choice model
reveals that almost all beneficiaries are misallocated at baseline and that the gains arising from eliminating misallocation would far exceed the costs. Our findings imply that large one-off transfers that enable people to take on more productive occupations can help alleviate persistent poverty.


Bandiera, O, M Ghatak, C Balboni and A Heil (eds) (2020), “DP14534 Why do people stay poor?”, CEPR Press Discussion Paper No. 14534. https://cepr.org/publications/dp14534