Household asset dynamics and shocks: an empirical assessment of asset-based poverty traps in Peru

Households that experience persistent poverty fall behind economically and can be caught in a poverty trap, especially in the presence of shocks capable of shifting their level of assets. However, empirical evidence can be instrumental in the design of policies and measures that would allow households an opportunity to escape. Using household level panel data from 2007 to 2010 and the 2007 magnitude 8.0 earthquake in Pisco, Peru, as an exogenous shock, we construct an asset index of two dimensions in order to explore household sensibility to shocks and to assess the existence of poverty traps. Our results reveal that a shock in assets is associated with an increase in both housing materiality and water/sanitation asset stocks and can be explained by access to mitigating factors such as aid, labour and finance. Furthermore, our findings indicate the existence of multiple equilibria, which is consistent with the poverty trap hypothesis. The existence of poverty traps in Peru has real implications for fighting poverty, in that without the adequate assistance, it cannot be eradicated.