Persistent poverty and informal credit

Paulo Santos and Christopher Barrett

Journal of Development Economics, 2011, vol. 96, issue 2, 337-347

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.

Keywords: Poverty; dynamics; Informal; credit; Social; networks; Ethiopia (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:96:y:2011:i:2:p:337-347

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