Poverty Traps with Constant Relative Risk Aversion: A Theoretical Analysis

Abstract

This paper explores the effect of risk attitudes on the existence and severity of poverty traps, by presenting a theoretical analysis of a poverty trap model in which the preferences of the agent follow constant relative risk aversion, and discussing possible policy implications. The analysis suggests that a poverty trap exists in the presence of constant relative risk aversion preferences. The ratio of the degrees of relative risk aversion for consumption and bequests is an important factor in determining the severity of the poverty trap. For certain extreme values of the ratio, there exists a continuum of steady states which keeps all agents trapped at their initial levels of capital stock.