Heterogeneous Wealth Dynamics: On the Roles of Risk and Ability

Abstract

This paper studies the causal mechanisms behind poverty traps, building on evidence of nonlinear wealth dynamics among a poor pastoralist population, the Boran from southern Ethiopia. In particular, it explores the roles of adverse weather shocks and individual ability to cope with such shocks in conditioning wealth dynamics. Using original data, we establish pastoralists' expectations of herd dynamics and show both that pastoralists perceive the nonlinear long-term dynamics that characterize livestock wealth in the region and that this pattern results from adverse weather shocks. We estimate a stochastic herd growth frontier that yields herder-specific estimates of unobservable ability on which we then condition our simulations of wealth dynamics. We find that those with lower ability converge to a unique dynamic equilibrium at a small herd size, while those with higher ability exhibit multiple stable dynamic wealth equilibria. Our results underscore the criticality of asset protection against exogenous shocks in order to facilitate wealth accumulation and economic growth and the importance of incorporating indicators of ability in the targeting of asset transfers, as we demonstrate with simulations of alternative asset transfer designs.

Keywords: ability, herd restocking, poverty traps, regression trees, shocks, subjective