Health and “Poverty Traps ” in Rural Developing Economies

This paper tests for the presence of a positive convex relationship between individual consumption and productivity using data from rural Ethiopia. Such a convexity underlies the theory of efficiency wages and can create a low-consumption, low-productivity (“poverty”) “trap ” operating through health status. I propose a test based on the predictions of a dynamic theoretical model of household consumption allocation which obviates the need to directly estimate the relationship between individual consumption and productivity directly. This is particularly advantageous, as at least one of these variables is typically not observed for individuals. Using semi-parametric estimation techniques, I find evidence of a convexity in the consumption-productivity relationship for households in the upper part of the land-per-worker distribution. Productivity incentives and the preference for equality appear to be in conflict for these rural households, who therefore face the possibility of a low-health, low-productivity steady state. Results also show that it is important to use a broad measure of an individual’s health or work capacity, as using a standard nutrition-based measure (body mass index) obscures these dynamics