Development Economics Seminar: Arun Advani (UCL/IFS)
|Dates:||8 November 2016|
|Times:||13:00 - 14:00|
|What is it:||Seminar|
|Organiser:||School of Social Sciences|
Title: Informal Insurance and Endogenous Poverty Traps.
Abstract: Households in developing countries appear to invest too little in `lumpy' capital goods, which from asset transfer programs are observed to have high returns. To understand why households are not able to use their own resources towards such investment, I construct a dynamic risk sharing model which incorporates limited commitment and lumpy investment. These two features interact to produce four key results: at low levels of initial capital there is a poverty trap; valuable risk sharing can crowd out lumpy investment; inequality has an inverse-U effect on growth; and larger risk-sharing groups will find it easier to invest. I use data from an asset transfer program in Bangladesh to test the predictions of the model. I then estimate structurally the parameters of the model, and I use this to understand how much the inability to commit reduces household welfare, and to quantify the gains from restructuring the asset transfer program to take into account the spillover effects through the poverty trap. The results of this paper have important implications for development policy more generally: whilst it is already known that the provision of public insurance can crowd out private insurance, it has not previously been recognised that this reduction in private insurance can be partly beneficial by making investment easier.
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