Three essays on heterogeneous capabilities, poverty trap thresholds, and the persistence of inequality

Abstract

The current trends in poverty measurement moving toward a focus on asset and wealth stocks, and hence away from traditional flow measures of consumption and income, warrant the scaling up of efforts to understand how individuals convert asset stocks into economic well-being. At the same time, modern advancements in computing power have led to an increase in the level of rigor associated with ex ante simulations of how macroeconomic changes potentially impact microeconomic well-being. In the presentation of three essays, this study investigates how individuals and households that are endowed with heterogeneous capabilities convert productive assets into economic well-being through the lenses of ex-post empirical analysis and an ex-ante macro-micro simulation. This analysis advances thinking on poverty an inequality by presenting a re-constructive critique of both the asset-based and human development/capabilities perspectives on poverty measurement, arguing that there are significant complementarities and reconcilable differences in which researchers can take significant advantage of. The theoretical and empirical insights regarding the role of capability disparities in conditioning household poverty trap thresholds are then applied in a preliminary fashion to a computable general equilibrium (CGE) model that is linked to a microsimulation model (MSM). The top-down behavioral CGE-MSM is capable of addressing the question of how macro changes impact poverty and income distribution when individuals are endowed with heterogeneous capabilities in an ex-ante fashion. In an attempt to isolate the impacts of macro changes on micro poverty and well-being, the questions of what poverty and well-being really are must be addressed first. The opening essay thus traces out the common origins, divergent evolution, and reconcilable differences across asset-based and Human Development/Capabilities perspectives of poverty. It is argued that asset-based studies have embedded in them a strong temptation to focus solely on asset accumulation policies without giving the conversion process of assets into livelihood its due study. Although the asset-based literature has made advances on the theoretical front in explaining how poverty trap thresholds are unique and dependent on intrinsic ability, the empirical analysis of what intrinsic ability may encompass remains understudied. The essay proposes that empirical asset-based studies of poverty trap thresholds stand to benefit from insights of the Human Development/Capabilities literature by viewing intrinsic ability as capability constraints which leads to differing opportunity costs. To illustrate the bridging role of opportunity costs, a simple, two-household model with heterogeneous opportunity costs is presented and applied to South Africa's most populated province. The results of the simple model underscore the need for a capabilities consistent asset-based framework. The second essay extends the first by asking how particular asset holdings are associated with capabilities to take on new economic opportunities. Knowledge of the patterns and linkages between capabilities and particular asset holdings has been relatively under- realized, particularly in the empirical poverty traps literature. Using the same household survey data of essay one, this essay seeks to empirically decompose how early period asset endowments impact future levels of well-being into direct and indirect mechanisms. A direct impact of asset endowments on future well-being would include consumption of the asset or the direct use of it to produce incomes (i.e. grain stock consumption or the sale of livestock offspring, respectively). The indirect impacts of endowments are of greater interest to this study and are of two forms: asset-to-asset complementarities and how household capabilities (or deprivations thereof) interact with particular asset holdings. To achieve this decomposition, this paper employs a method of path analysis akin to early heritability of traits studies which were aimed at distinguishing between the effects of nature versus nurture. This second essay contributes to the prior literature in three primary ways. First, it adds empirical robustness to prior theoretical work linking intrinsic ability with household-specific poverty trap thresholds. Second, it bridges the quantitative work on poverty traps with qualitative insights from the human development/capabilities literature by identifying which particular asset holdings are associated with different household capability constraints. Lastly, it serves as a reminder to policy that measuring poverty as asset stocks requires additional knowledge about the process of converting those assets into well-being. After the first two essays tackle the issue of poverty measurement and its conversion into economic well-being, the final essay reviews a host of macro, micro, and macro-micro modeling strategies in order to draw out central features of a framework that can address the micro impacts of macro changes in the presence of heterogeneous behavioral responses. Additionally, this essay presents a preliminary framework of that model and explores how capabilities, that heterogeneously impact the occupational choice of individuals, might be incorporated. When there are heterogeneous responses to changes in the macroeconomic employment situation, the identification of winners and losers of potential macro-policy changes in an ex-ante fashion is more complex. Standard computable general equilibrium (CGE) models are only able to identify between group changes in income distributions and not within group changes. Additionally, there is a lack of capacity to include unique behavioral responses. One alternative is to link a behavioral microsimulation model (MSM) to a CGE. The benefit of this approach is that the outcomes of behavior are aggregated rather than behavior itself being homogenized and aggregated as is implicitly done in models with representative agents or household groups. Though the original aim of the entire study - to put forth a macro-micro model flexible enough to incorporate heterogeneous behavior - was accomplished, the true benefits of the study come from considering the linkages between capabilities, poverty trap thresholds, and the distribution of well-being in greater detail.