Samuel Bowles

Karla Hoff

Steven N. Durlauf

Much popular belief--and public policy--rests on the idea that those born into poverty have it in their power to escape. But the persistence of poverty and ever-growing economic inequality around the world have led many economists to seriously question the model of individual economic self-determination when it comes to the poor. In Poverty Traps, Samuel Bowles, Steven Durlauf, Karla Hoff, and the book's other contributors argue that there are many conditions that may trap individuals, groups, and whole economies in intractable poverty. For the first time the editors have brought together the perspectives of economics, economic history, and sociology to assess what we know--and don't know--about such traps. Among the sources of the poverty of nations, the authors assign a primary role to social and political institutions, ranging from corruption to seemingly benign social customs such as kin systems. Many of the institutions that keep nations poor have deep roots in colonial history and persist long after their initial causes are gone. Neighborhood effects--influences such as networks, role models, and aspirations--can create hard-to-escape pockets of poverty even in rich countries. Similar individuals in dissimilar socioeconomic environments develop different preferences and beliefs that can transmit poverty or affluence from generation to generation. The book presents evidence of harmful neighborhood effects and discusses policies to overcome them, with attention to the uncertainty that exists in evaluating such policies.

Poverty Traps

An earlier paper showed that an economy could be trapped in an equilibrium state in which the absence of the rule of law led to asset-stripping, and the prevalence of asset-stripping led to the absence of a demand for the rule of law, highlighting a coordination failure. This paper looks more carefully at the dynamics of transition from a non-rule-of-law state. The paper identifies a commitment problem as the critical feature inhibiting the transition: the inability, under a rule of law, to forgive theft. This can lead to the perpetuation of the non-rule-of-law state, even when it might seem that the alternative is Pareto-improving.

Exiting a Lawless State

Karla Ruth Hoff

Arijit Sen

An institution found in many traditional societies is the extended family system (kin system), an informal system of shared rights and obligations among extended family for the purpose of mutual assistance. In predominantly non-market economies, the kin system is a valuable institution providing critical community goods and insurance services in the absence of market or public provision. But what happens when the market sector grows in the process of economic development? How do the members of kin groups respond, individually and collectively, to such changes? When the kin system "meets" the modern economy, does the kin system act as a "vehicle of progress" helping its members adapt, or as an "instrument of stagnation" holding back its members from benefiting from market development? In reality, the consequences of membership in a kin group have been varied for people in different parts of the world. Hoff and Sen characterize the conditions under which the kin system becomes a dysfunctional institution when facing an expanding modern economy. The authors first show that when there are moral hazard problems in the modern sector, the kin system may exacerbate them. When modern sector employers foresee that, they will offer employment opportunities on inferior terms to members of ethnic groups that practice the kin system. These entry barriers in the market, in turn, create an incentive for some individuals to break ties with their kin group, which hurts members of the group who stay back in the traditional sector. The authors then show in a simple migration model that if a kin group can take collective action to raise exit barriers, then even if migrating to the modern sector and breaking ties increases aggregate welfare (and even if a majority of members are expected to gain ex post, after the resolution of uncertainty about the identity of the winners and losers), a majority of agents within a kin group may support ex ante raising the exit barrier to prevent movement to the modern sector. This result is an example of the bias toward the status quo analyzed by Raquel Fernandez and Dani Rodrik in the context of trade reform. The authors do not claim that all kin groups will necessarily exhibit such a bias against beneficial regime changes. But they provide a clear intuition about the forces that can lead to the collective conservatism of a kin system facing expanding opportunities in a market economy-forces that can lead the kin group to become a poverty trap for its members.

Karla Hoff

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