We'd like to thank a referee and an Associate Editor of the Journal for valuable comments and suggestions. Part of the research was conducted when Chen and Lu are visiting Department of Economic, Washington University in St. Louis. They thank the hospitality offered by the Department, especially Ping Wang, the department chair.

Why have some poor countries been able to take off while others are still stuck in the poverty trap? To address this old question, we observe that (i) with similar or higher levels of educational attainment, trapped countries tend to have much poorer health conditions compared to the initially poor countries that later took off, and (ii) improving health conditions in poor countries usually involves large-scale investment where such resources can be easily misallocated. We construct a dynamic general equilibrium model with endogenous health and knowledge accumulation, allowing health-related institutional barriers to affect individual incentives and equilibrium outcomes. We then calibrate the model to fit (i) the U.S. economy (as a benchmark), (ii) a representative trapped economy based on the average economic performance and economic conditions of 41 countries that are still in the poverty trap, (iii) a group of trapped economies with richer institutional data (Bangladesh, Kenya and Nigeria), and (iv) two initially poor countries that later took off (China and India). The results show that, although low among all countries in this study, the U.S. economy still faced a health-related institutional barrier of 15%. The trapped economies all suffered much large barriers ranging from 50% to 73% under which the incentive to invest in health is severely hindered. For China and India, the magnitudes of such barriers were large (about twice as much as for the U.S. and half that for the trapped economies on average) but not enough to undermine the willingness to invest in health. This paper thereby advances our understanding of the role played by barriers to health in the poverty trap.

and the Ministry of Science and Technology of Taiwan are greatly appreciated. We wish to express special thanks to Suqin Ge and Dennis Tao Yang for providing the data on the skill premium in China. Needless to say, the usual disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w23939.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We'd like to thank a referee and an Associate Editor of the Journal for valuable comments and suggestions. Part of the research was conducted when Chen and Lu are visiting Department of Economic, Washington University in St. Louis. They thank the hospitality offered by the Department, especially Ping Wang, the department chair.

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