Why Do People Stay Poor?*

There are two broad views as to why people stay poor. One emphasizes differences in fundamentals, such as ability, talent, or motivation. The poverty traps view emphasizes differences in opportunities that stem from access to wealth. To test these views, we exploit a large-scale, randomized asset transfer and an 11-year panel of 6,000 households who begin in extreme poverty. The setting is rural Bangladesh, and the assets are cows. The data support the poverty traps view-we identify a threshold level of initial assets above which households accumulate assets, take on better occupations (from casual labor in agriculture or domestic services to running small livestock businesses), and grow out of poverty. The reverse happens for those below the threshold. Structural estimation of an occupational choice model reveals that almost all beneficiaries are misallocated in the work they do at baseline and that the gains arising from eliminating misallocation would far exceed the program costs. Our findings imply that large transfers, which create better jobs for the poor, are an effective means of getting people out of poverty traps and reducing global poverty.

Automated summary

This study explores two views on poverty and finds that the poverty traps view is more supported. Through an asset transfer experiment, the research discovers that when initial assets of impoverished households exceed a certain threshold, they are able to accumulate wealth, change occupations, and escape poverty. Additionally, the structural estimation of an occupational choice model reveals that eliminating misallocation can bring significant gains.