Abstract

Can location make the difference between growth and contraction in living standards for otherwise identical households? We test for the existence of spatial poverty traps using a micro model of consumption growth incorporating geographic externalities, whereby neighborhood endowments of physical and human capital influence the productivity of a household’s own capital. By allowing for nonstationary but unobserved individual effects on growth rates we are able to deal with latent heterogeneity, yet identify impacts of stationary geographic variables. The model is estimated on farm-household panel data from post-reform rural China. We find strong evidence of spatial poverty traps. Our results strengthen both the efficiency and equity case for investing in the geographic capital of poor people.