Paulo Santos, Monash University, and Christopher B. Barrett

Heterogeneous Wealth Dynamics: The Role of Risk and Ability

This paper studies the causal mechanisms behind persistent poverty. Using original data on Boran pastoralists of southern Ethiopia, Santos and Barrett find that heterogeneous and nonlinear wealth dynamics arise purely in adverse states of nature. In favorable states, expected herd grow is quasi-linear and universal. The researchers further show that those with lower herding ability, as reflected in past herd growth data, converge to a unique equilibrium at a small herd size while those with higher ability exhibit multiple stable dynamic wealth equilibria.