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From theory we know that the time-preference rate and the intertemporal elasticity of substitution have independent effects on individual savings. We argue that the latter should be more emphasized as an explanation for low consumption traps among the poor in developing countries. As the permanently sustainable consumption converges towards a subsistence level, we argue that the absolute value of the elasticity of the marginal utility of consumption is likely to converge towards infinity, and consequently, the intertemporal elasticity of substitution converges towards zero. As a result, even far-sighted households may prefer to stay poor due to the high marginal disutility of saving near subsistence level.

Magnus Hatlebakk

Senior Researcher; Coordinator: Poverty Dynamics