Protective Capital and Poverty Traps

We investigate a protective role for capital and the implications on poverty reduction policies. Within the framework of an overlapping generations model, the accumulation of tax-funded ‘protective capital ’ increases the survival probability of productive capital from disastrous events. Key findings highlight how a low survival probability of capital can stimulate a shift to higher or lower early consumption, which might result in escapable or inescapable traps. The model explains that injection of capital can be ineffective if the required level of protection has not been attained. We show how higher TFP assists wage tax system to escape from traps