The role of direct capital cash transfers towards poverty and extreme poverty alleviation - an omega risk process

Abstract

Trapping refers to the event when a household falls into the area of poverty. Households that live or fall into the area of poverty are said to be in a poverty trap, where a poverty trap is a state of poverty from which it is difficult to escape without external help. Similarly, extreme poverty is considered as the most severe type of poverty, in which households experience severe deprivation of basic human needs. In this article, we consider an Omega risk process with deterministic growth and a multiplicative jump (collapse) structure to model the capital of a household. It is assumed that, when a household's capital level is above a certain capital barrier level that determines a household's eligibility for a capital cash transfer programme, its capital grows exponentially. As soon as its capital falls below the capital barrier level, the capital dynamics incorporate external support in the form of direct transfers (capital cash transfers) provided by donors or governments. Otherwise, once trapped, the capital grows only due to the capital cash transfers. Under this model, we first derive closed-form expressions for the trapping probability and then do the same for the probability of extreme poverty, which only depends on the current value of the capital given by some extreme poverty rate function. Numerical examples illustrate the role of capital cash transfers on poverty and extreme poverty dynamics.