build on future incomes (while the disadvantaged ones are unable to do so) and
convergence towards the mean given large and uncorrelated transitory shocks.
This paper explores the key factors that cause changes in the economic wellbeing
of rural households in Kenya. We specifically determine the relationship between the
initial economic position of households and education on income growth and mobility.
Evidence of income persistence for the poor would be consistent with the notion of
cumulative (dis)advantage and possible existence of poverty traps. Further, we explore
whether and how policies in education could be used to break income persistence for the
very poor. Given the wide variation in poverty across and within regions, differences in
the above impacts across income groups and regions of the country are explored.
The justification in using household income as opposed to consumption has been
the perceived inability of poor households to smooth their consumption over time
especially within households facing liquidity constraints or limited asset base. Using
evidence from Ivory Coast and Thailand, Deaton (1997) finds consumption profile to be
closely linked to the income profile and argues that the ‘life-cycle model overstates the
degree to which consumption is in fact detached from income over the life cycle’. This
evidence implies failure of consumption smoothing in some cases, thus confirming
relevance in the studies of income dynamics within the broader context of poverty
reduction. An understanding of household income dynamics is fundamental to
understanding the dynamics of household economic wellbeing (Baulch and Hoddinott,
2000). According to Fields et al. (2003b), the rise and fall of income and consumption
experienced by households are the most direct indicators of who benefits from economic
development.