Poverty traps across levels of aggregation

Poverty trap studies help explain the simultaneous escape from poverty by some households and regions alongside deep and persistent poverty elsewhere. However, researchers remain divided about how important poverty traps are in explaining the range of poverty dynamics observed in various contexts. We build a theoretical model that integrates micro-, meso-, and macro-level poverty traps, allowing us to analyze the ways in which multiple layers of poverty traps interact and reinforce each other. Through this simulation model, markets and institutions arise endogenously and help certain individuals escape poverty, while others remain persistently poor. In addition to one’s own productivity and initial capital levels, we explore how individual opportunity and income can be heavily determined by market access and institutional factors beyond one’s control. Using simulation results from controlled experiments, we can identify the role played by meso- and macro-conditions (that correspond to local markets and country-wide institutions, respectively) in helping individuals escape poverty. Our results suggest that even in a parsimonious model—with optimizing, forward-looking agents operating in a world with only one trap at each level—local and national context matters immensely and combines to determine individual opportunity in complex ways.