Belief-based poverty traps and the effects of material and psychological development interventions

We study how development interventions can affect economic outcomes via agency beliefs. We model an agent who is uncertain about her agency, and focus on the situation that the agent underestimates her agency. Material development interventions increase the agent’s initial wealth, but may negatively affect her beliefs about her agency, thus decreasing effort and final wealth, and potentially generating a belief-based poverty trap. Instead, psychological interventions can increase beliefs about agency, thus turning the effect on effort and final wealth. A combination of both interventions can combine the positive effects of increased initial wealth and increased agency beliefs