Multiple equilibria are poverty traps

Multiple equilibria arise in a variety of situations. An iconic example of multiple equilibria are poverty traps: Kiminori Matsuyama has a helpful discussion of poverty traps “” , and Mullaianathan and Shafir describe their behavioral poverty trap “” . We have discussed others in class, for instance in the third problem set. (attached) Describe some setting (other than the calorie poverty trap) where there may be multiple equilibria that you think is relevant to economic development. These types of issues are equally as important for micro and macro settings, so you should feel free to focus a setting that you care about. A good paper will do the following: a) Describe the theory (in words or math) underlying the poverty trap. b) Pick a specific place and describe the economic environment. What in the data suggests that the poverty trap actually might exist? What type of analysis would you need to undertake? You do not need to analyze your own data (although of course it is encouraged), but you should at least find relevant empirical research. Be careful to distinguish between features that are consistent with a poverty trap (e.g. hungry people have less energy), and those that are consistent only with a poverty trap (how much less energy do they have?). c) You should be able to do simulations on the computer: take your formal model of the specific environment you are studying, plugging the relevant values from the data, and then seeing if there is in fact scope for a poverty trap. d) Discuss if there a realistic role for policies that could make everyone better off.

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