Why the poor stay poor

There are two broad views as to why people stay poor. One emphasizes differences in fundamentals, such as ability, talent or motivation. The other, poverty traps view, differences in opportunities which stem from differences in wealth. We exploit a large-scale, randomized asset transfer and panel data on 6000 households over an 11 year period to test between these two views. The data supports the poverty traps view – we identify a threshold level of initial assets above which households accumulate assets, take on better occupations and grow out of poverty. The reverse happens for those below the threshold. Structural estimation of an occupational choice model reveals that almost all beneficiaries are misallocated in the work they do at baseline and that the gains arising from eliminating misallocation would far exceed the program costs. Our findings imply that big push policies which transform job opportunities represent a powerful means of addressing the global mass poverty problem. Robin Burgess is a Professor of Economics, Co-Founder and Director of the International Growth Centre and Director of the Economics of Environment and Energy Research Programme, all at the LSE. He also serves as the current President of BREAD, on the Editorial Board of VoxDev, on the Board of CEGA and is an Affiliate of J-PAL and Y-RISE, a Research Fellow in CEPR and a Fellow of the British Academy. His main interests are in the areas of environmental economics, development economics and political economy and he is currently working in Bangladesh, Brazil, Kenya, India, Indonesia, Myanmar, Pakistan and Uganda.