Chapter 5: Risk and Inequality
The purpose of this chapter is to provide a semi-rigorous treatment of the relationship between risk and inequality over time. There has been a lot of interest in the risk coping strategies of the poor in the recent literature but little work on the relationship between these strategies and inequality (Fafchamps 1999b). Some have begun to suspect that certain risk coping strategies further impoverish the poor (for example Sen 1981, Dasgupta 1993). Labour bonding and debt peonage are examples that we have discussed earlier (for example de Janvry 1981, Srinivasan 1989). Patronage, that is, the protection of the poor by the rich in exchange for labour and services, is also suspected of perpetuating poverty (for example Platteau 1995a, Platteau 1995b). The purpose of this chapter is to clarify the relationship between inequality and risk. Our objective is to understand how wealth accumulation and risk sharing aﬀect the evolution of inequality over time. We ignore possible feedback eﬀects between inequality and social choices (Benabou 2000). Mookherjee and Ray (2000) have shown that, in a generic model with human capital accumulation, persistent inequality can arise. Multiplicity of steady states may also occur if human capital is indivisible. A similar result is obtained in Durlauf (1996) in a model where wealth feeds back into educational investment through the ﬁnance of local public schools. Here we abstract from human capital issues. The persistence of inequality is studied in detail for the US in Arrow et al. (2000). We focus, here on poor...
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