On Poverty Traps, Thresholds and Take-Offs∗

Recent studies on economic growth focuses on persistent inequality across countries. In this paper we study mechanisms that may give rise to such a persistent inequality. We consider countries that accumulate capital in order to increase the per capita income in the long run. We show that the long-run growth dynamics of those countries can generate a twin-peak distribution of per capita income. The twinpeak distribution is caused by (1) locally increasing returns to scale and (2) financial market constraints. Those two forces give rise to a twin-peak distribution of per capita income in the long run. In our model investment decisions are separated from consumption decisions and we thus do not have to consider preferences. Empirical evidence in support of a twin-peak distribution of per capita income is provided. JEL classification: C 61, C 63, L 10, L 11 and L 13 We want to thank Buz Brock, Philippe Aghion and Alexei Onatski for helpful discussions and Lars Grüne for help on the numerical part of the paper. We also want to thank Michael Landesmann and two referees of the journal for very helpful comments. Center for Empirical Macroeconomics, Bielefeld and New School University Bielefeld University