Short-Lived Shocks with Long-Lived Impacts? Household Income Dynamics in a Transition Economy

It is possible in theory that the persistent poverty that has emerged in many transition economies is due to underlying nonconvexities in the dynamics of household incomes, such that a vulnerable household will never recover from a sufficiently large but short-lived shock to its income. To test the theory we estimate a dynamic panel data model of household incomes with nonlinear dynamics and endogenous attrition. Our estimates on data for Hungary in the 1990s exhibit nonlinearity in the income dynamics. But we do not find evidence of nonconvexities. In general, households bounce back from transient shocks though the process is not rapid.