Persistent Poverty and Informal Credit

Posted: 23 May 2011

See all articles by Christopher B. Barrett

Christopher B. Barrett

Cornell University - Charles H. Dyson School of Applied Economics & Management

Paulo Santos

Cornell University

Date Written: August 1, 2010


This paper explores the consequences of nonlinear wealth dynamics for the formation of bilateral credit arrangements to help manage idiosyncratic risk. Using original data on expected wealth dynamics, social networks and informal loans among southern Ethiopian pastoralist households, we find that the threshold at which expected wealth dynamics bifurcate serves as a focal point at which lending is concentrated. Informal lending responds to recipients’ losses but only so long as the recipients are not “too poor”. Our results suggest that when shocks can have long term effects, loans are best understood as providing a safety net rather than a scale-neutral insurance mechanism. Furthermore, the persistently poor are excluded from social networks that are necessary to obtain loans given in response to shocks.

Suggested Citation

Barrett, Christopher B. and Santos, Paulo, Persistent Poverty and Informal Credit (August 1, 2010). Journal of Development Economics, Forthcoming, Available at SSRN:

Christopher B. Barrett (Contact Author)

Cornell University - Charles H. Dyson School of Applied Economics & Management ( email )

315 Warren Hall
Ithaca, NY 14853-7801
United States
607-255-4489 (Phone)
607-255-9984 (Fax)


Paulo Santos

Cornell University ( email )

Ithaca, NY 14853
United States

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