Two factors that have received limited attention in poverty dynamic
studies are the role of risk in causing poverty mobility and attrition
bias. Controlling for the attrition bias, we study poverty dynamics in
urban Ethiopia with an emphasis on the effect of idiosyncratic shocks
and informal risk management strategies. We used a unique panel data
spanning a decade. Our results show the adverse impact of uninsured
idiosyncratic shocks on welfare. We find unemployment of household head
propels households to persistent poverty. We also observe poor
households using ineffective risk management strategies which have
negative consequences on welfare than their non-poor counterparts.
Further, we find strong poverty state dependence which is mainly driven
by households' heterogeneity. The overall results of our study suggest
that public insurance programmes that support poor households during
'bad times' may improve welfare by providing consumption insurance.
Indeed, policies focusing on household heterogeneities such as exposure
to risk, lack of education, personal skills and capacities, could have
long lasting effects.
JEL Classification: D14; I32; O12
Keywords: Poverty persistence, idiosyncratic shock, endogenous switching model