Chronic poverty is not just a snapshot of those who are poor now, but a condition that requires an understanding of the processes that make, and keep, people poor. The economic analysis of chronic poverty must take into account the interaction between external circumstances and intrinsic psychological factors like aspirations, self-confidence and willpower.

How do the extrinsic circumstances of individuals interact with their intrinsic motivation and choices? Traditional economic theory assumes that both extrinsic circumstances and psychological factors like aspirations are taken as given when individuals make choices. However, work by social scientists such as Appadurai (2004), on poverty traps and social exclusion would seem to indicate that the extrinsic circumstances of individuals impact on both intrinsic motivation and choices. This issue is clearly important for policy purposes: when should policy address the extrinsic circumstances of individuals (like initial wealth social status, health) and when should policy address the psychological factors (like aspirations, self-confidence, willpower) of individuals? What is the appropriate policy mix for alleviating chronic poverty?

The basic objective will be to formulate and analyze a formal model of social interaction with multiple welfare-ranked equilibria and develop an equilibrium selection argument via adaptive, stochastic play which attaches to a specific social outcome a probability as a function of the initial distribution of extrinsic circumstances (wealth, social status) across individuals.

The anticipated results will explain concerns such us: why structural poverty reduction must consider empowering of individuals, why some paternalistic policies have in general failed, why role models matter or why “small” institutional barriers that would appear insignificant in a cost benefit analysis must be taken into consideration to break a poverty trap.

The project has been awarded a DFID/ESRC grant with effect from May 2008 until July 2009. The principal investigator of the project is Sayantan Ghosal, and Patricio Dalton is the research assistant.