Poverty Traps and Human Capital Accumulation

In this paper I show that persistent inequality in the distribution of human capital and a negative relation between initial inequality and steady‐state aggregate output may follow from the fact that the poor require relatively higher returns to increase expenditure on education. Moreover, I show that poverty traps emerging in models where individual transitions do not depend on aggregate dynamics, though not robust to the introduction of idiosyncratic uncertainty, may still be relevant observationally, if idiosyncratic shocks occur with low probability. In this context, I also analyse the implications of introducing a public education system.