Informal insurance in the presence of poverty traps: Evidence from southern Ethiopia

Recent empirical work finds evidence of highly nonlinear wealth dynamics among Boran pastoralists of southern Ethiopia, consistent with the hypothesis of poverty traps. This paper explores the consequences of such dynamics for informal inter-household transfers. Using original primary data on social networks and transfers, we find that asset transfers respond to recipients’ losses, but only so long as the recipients are not “too poor”. The persistently poor are excluded from social networks and do not receive transfers in response to shocks. We also find some evidence that the threshold at which wealth dynamics bifurcate may serve as a focal point at which transfers are concentrated. This suggests that asset transfers, in the context of poverty traps, may aim to insure the permanent component of income generation, rather than the transitory component, as standard insurance models assume.