Blume: The Problem with Poverty Traps
On December 3, Larry Blume, VGSF Fellow at IHS and Goldwin Smith Professor of Economics and Professor of Information Science at Cornell University, gave a public lecture on the problem with poverty traps.
Models of poverty traps are dynamical systems with more than one attractor. Similar dynamical systems arise in optimal growth and macroeconomic models. These systems are often studied empirically by ad hoc methods relying on intuition from deterministic systems, such as looking for multiple peaks in the distribution of states. We show that in a stochastic model of poverty traps, multiple peaks may not exist, or may be very hard to detect and that some deterministic attractors are stochastically stable, while others are not. We examine the comparative statics of stochastically stable states and show how deterministic models give correct short-run descriptions of the model’s dynamic behavior, but incorrect long-run descriptions.