Safety nets and production systems: Evidence from a pseudo-panel of Ghanaian household data

Empirical research has shown that poor households involved in low-risk low-return low-input subsistence activities, once protected by a safety net, might opt for activities which, although riskier and requiring much more inputs, ultimately lead to a higher living standard. This paper expands on recent theoretical advances and applies an innovative empirical strategy to study this phenomenon. In particular we compare the dynamics of two household production systems, a low-risk system that is typical for the poor and a high-risk system with a much higher equilibrium living standard. Each system has a threshold initial living standard or set-up cost which can induce a poverty trap. Presumably, both the threshold and the risk are particularly high for the high-income system, implying that households opting for this system must be sufficiently wealthy to start with and also need additional protection from a safety net. Few studies have brought this model to test, especially in Sub-Saharan Africa where widespread safety nets are rare and household panel data, if available, consist of only small samples. To test this model we find an empirical approximation of the construct of safety nets and production systems by pooling five rounds of a large-scale household survey in Ghana