Andrés Zambrano, Universidad de Los Andes (Colombia)

Sala 209

“Endogenous Persistent Shocks and Poverty Traps”

Coautoreado con Mateo Arbelaez y Leopoldo Fergusson

Abstract: Adverse shocks are common in developing countries. Since markets are incomplete, households must significantly distort their decisions to cope with these shocks. These distortions not only affect current utility but can also increase the vulnerability to future shocks, which in turn could trap households in a low-income equilibrium. This paper uses Colombian longitudinal data to estimate the persistence of adverse shocks, which is found to be between 8 and 11 percentage points, and find that such persistence is mostly explained by decreases in consumption after a realized adverse shock. We also show that, while households in the lowest and highest quintiles use assets to smooth consumption, households in the middle of the wealth distribution decrease consumption significantly after a shock. We then propose a model and calibrate it with the persistence estimates to rationalize the observed behavior, and find that a poverty trap exists for the first two quintiles.