Economics © Springer-Verlag 1993 On opulence driven poverty traps*

Abstract. Endogenous population growth, i.e., making the rate of population growth dependent on society's opulence, causes parametric hanges to have a larger impact and can cause multiplicity of steady states in a dynamic intertem-poral optimization framework. This provides a simple explanation for the possibility of differing rowth paths between countries (using a standard produc-tion function) or another explanation of the 'poverty trap'. We give two examples ('opulence sensitivity ' and 'production sensitivity') that both give rise to three steady states in which poor (rich) countries will evolve over time to the low (high) income steady state. In both examples there are middle income countries that will choose the low (high) income steady state if they are impatient (patient), where patience ismeasured through the rate of time preference Q. Foreign aid in the form of a large transfer of capital from abroad enables poor and impatient middle in-come countries to move to the high income steady state. 1