Poverty Trap

A poverty trap is a situation in which an individual, household, or other economic entity (such as a whole economy) is unable or unlikely to escape the socioeconomic situation of poverty on its own effort, despite individuals taking optimal decisions. Poverty is thereby understood either in monetary income terms (e.g., falling below a poverty-line threshold) or as a broader concept. A poverty trap is usually caused by some forms or combinations of market failures, most notably involving financial borrowing constraints, coordination failure, or information asymmetries. If such imperfections are relevant enough, the market equilibrium will not produce the possible social welfare optimum. Accordingly, and owing to the self-reinforcing nature of a poverty trap, its potential existence and understanding is of immense policy relevance since a ...