Poverty traps and intergenerational transfers

In this paper, by adopting an OLG neoclassical growth model, we show that intergenerational transfers may trigger the take off of an economy entrapped into poverty in a twofold way: (1) by eliminating the zero equilibrium, which, under technology with low factor substitutability, is always a “catching” point, so that the economy might start converging to a positive equilibrium. In this case, the appropriate instrument turns out to be a transfer from the old to the young, while there is no room for policies redistributing in the opposite direction (i.e., a pay-as-you-go pension scheme); (2) when the rich equilibrium is unstable—which can be the case under high intertemporal elasticity of substitution of individuals—the introduction of transfers may stabilize such an equilibrium, so that the economy starts converging to it. In the latter case, both policy programs such as pay-as-you-go pension schemes or subsidies to the young may help escaping from poverty. However, we point out that in either circumstance, the “size” of transfers should be sufficiently large (and, as for pensions, not even too large), in order to avoid ineffective and useless burden on the taxpayers without triggering the take off.