Persistent poverty and informal credit

Paulo Santos, Christopher Barrett

Research output: Contribution to journalArticleResearchpeer-review

46 Citations (Scopus)

Abstract

This paper explores the consequences of nonlinear wealth dynamics for the formation of bilateral credit arrangements to help manage idiosyncratic risk. Using original data on expected wealth dynamics, social networks and informal loans among southern Ethiopian pastoralist households, we find that the threshold at which expected wealth dynamics bifurcate serves as a focal point at which lending is concentrated. Informal lending responds to recipients losses but only so long as the recipients are not too poor . Our results suggest that when shocks can have long term effects, loans are best understood as providing a safety net rather than a scale-neutral insurance mechanism. Furthermore, the persistently poor are excluded from social networks that are necessary to obtain loans given in response to shocks.
Original languageEnglish
Pages (from-to)337 - 347
Number of pages11
JournalJournal of Development Economics
Volume96
Issue number2
DOIs
Publication statusPublished - 2011
Externally publishedYes

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