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The Annals of Regional Science

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30-01-2022 | Original Paper

Household asset dynamics and shocks: an empirical assessment of asset-based poverty traps in Peru

Authors: Alicia Chavez, Marcelo Lufin

Published in: The Annals of Regional Science | Issue 1/2022

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Abstract

Households that experience persistent poverty fall behind economically and can be caught in a poverty trap, especially in the presence of shocks capable of shifting their level of assets. However, empirical evidence can be instrumental in the design of policies and measures that would allow households an opportunity to escape. Using household level panel data from 2007 to 2010 and the 2007 magnitude 8.0 earthquake in Pisco, Peru, as an exogenous shock, we construct an asset index of two dimensions in order to explore household sensibility to shocks and to assess the existence of poverty traps. Our results reveal that a shock in assets is associated with an increase in both housing materiality and water/sanitation asset stocks and can be explained by access to mitigating factors such as aid, labour and finance. Furthermore, our findings indicate the existence of multiple equilibria, which is consistent with the poverty trap hypothesis. The existence of poverty traps in Peru has real implications for fighting poverty, in that without the adequate assistance, it cannot be eradicated.

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Panel data from the Peruvian National Household Survey on Living Conditions and Poverty.

We performed both a two-sample t test and Little's chi-squared test for covariate-dependent missingness (CDM) and find no evidence that eliminating households interviewed after August was not at random. Therefore, our final sample of 1,273 observation is reliable and representative.

We performed several analyses to test the reliability of both dimensions, and, even though the Housing Materiality dimension is far more significant than the water/sanitation dimension, both are highly reliable. Furthermore, to prove their accuracy, we run a discriminant analysis to test their capacity to predict group membership (in this case poverty). Results confirm that they are good predictors for poverty/non-poverty with total predictability capacity of 78.9%, which is in line with the literature (Burns and Burns 2008; Linting et al. 2007).

For more information about this issue see Carter et al. (2007), (p. 840).

A loss in assets is defined as the difference between the shock asset level \({{\varvec{A}}}_{{\varvec{si}}}\) and the pre-shock asset level \({{\varvec{A}}}_{{\varvec{pi}}}\).

It should be noted that households not exposed to the shock may have also suffered a loss of assets. The asset growth path of households not exposed to the shock could also be interrupted by indirect effects of the earthquake. This is a desirable result because we need the presence of a large general movement in assets levels to evaluate the existence of poverty traps.

The quartiles are included as a dummy approach. Quartiles were calculated according to households’ pre-shock holding of assets in the housing materiality dimension.

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Title: Household asset dynamics and shocks: an empirical assessment of asset-based poverty traps in Peru
Authors: Alicia Chavez
Marcelo Lufin
Publication date: 30-01-2022
Publisher: Springer Berlin Heidelberg
Published in: The Annals of Regional Science / Issue 1/2022
Print ISSN: 0570-1864
Electronic ISSN: 1432-0592
DOI: https://doi.org/10.1007/s00168-021-01108-4

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