Heterogeneous Wealth Dynamics: On the Roles of Risk and Ability

We study the causal mechanisms behind persistent poverty. Using original data on Boran pastoralists of southern Ethiopia, we find that nonlinear wealth dynamics arise purely due to shocks. In favorable states of nature, expected herd growth is linear and universal. We further show that ability to deal with shocks matters. Multiple stable equilibria characterize the wealth dynamics of herders of higher ability, while those with lower ability converge to a unique equilibrium at a small herd size.