86. Jyotsna Jalan and Martin Ravallion

Abstract

How important are neighborhood endowments of physical and human capital in explaining diverging fortunes over time for otherwise identical households? To answer this question we develop an estimable micro model of consumption growth allowing for constraints on factor mobility and externalities, whereby geographic capital can influence the productivity of a household's own capital. Out statistical test has considerable power in detecting geographic effects given that we control for latent heterogeneity in measured consumption growth rates at micro level. We find robust evidence of geographic poverty traps in household panel data from post-reform rural China. Our results strengthen the equity and efficiency case for public investment in lagging poor areas in this setting.

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