Habit Formation and the Misallocation of Labor: Evidence from Forced Migrations
56 Pages Posted: 21 May 2019
Date Written: March 27, 2019
We present evidence suggesting that attachment to a place is an important impediment to mobility. Our research design is based on the resettlement of 11% of Finns after World War II. Farmers were moved to other parts of Finland and given similar farms as the ones they had lost. We find that the resettlement increased their later likelihood to leave agriculture and to move to urban areas. It also increased their long-term income and education. By contrast, forced migration decreased income of the resettled urban population. We rationalize these findings with a Roy model augmented with habit formation for residential location.
JEL Classification: J61, O15, N34
Suggested Citation: Suggested Citation