Paper #: 03-03-020
This essay is intended to describe a perspective on poverty traps in which persistence in economic status is generated by group-level influences on individuals. What distinguishes this theory from other explanations of poverty is its emphasis on the role of social, as opposed to individual-level characteristics. One way to see this contrast is in the context of models of intergenerational mobility. One body of research, due to Becker and Tomes (1979) and Loury (1981), explains persistence in relative economic status across generations via the effects of parental income on offspring education. In these models, parents directly invest in their children’s education, the level of which determines (along with random factors such as luck) the income of the next generation. In such models, inequality is persistent across generations because lower income parents invest less in education than their higher income counterparts. In contrast, models such as Bénabou (1993,1996), Durlauf (1996a,b), Fernandez and Rogerson (1997) consider the effects of residential neighborhood on education. In these models, a child’s education is determined, at least in part, through factors such as school quality and by characteristics of others in the neighborhood in which he grows up. These interactions mean that relative economic status persists across generations when economic segregation exists. Poor families live in poor neighborhoods, which depress the future economic prospects of their offspring. Of course, individual- and group-level characteristics are themselves interdependent. Parental income influences this because it determines what neighborhood a child lives in. Nevertheless, individual- and group-level explanations of poverty have different implications both in terms of understanding the sources of poverty and inequality as well as in terms of the design of public policies. Outside the confines of academia, the recognition that social factors play a fundamental role in the perpetuation of poverty is a very standard idea. Ralph Ellison is hardly unique in recognizing how space and community influence individual perceptions, aspirations, and opportunities. The fact that this perspective has only recently become a key feature of economic reasoning should not be attributed to the insularity of economic reasoning but rather to the success of individual-based models of economic inequality, e.g. models that focus on human capital formation, to elucidate many aspects of income inequality. At the same time, the apparent imperviousness of poverty in places such as inner cities has provided the context in which this new perspective has developed (footnote: As argued in Manski , another reason this perspective has blossomed is the development of mathematical tools that allow for formal modeling of the substantive ideas at its foundations. See Blume and Durlauf  for a discussion of some of these technical advances.).