Habit Formation and the Misallocation of Labor: Evidence from Forced Migrations

Abstract

We examine the long-term effects of resettling 11% of the Finnish population during World War II. Entire rural communities were moved to locations that resembled the origin areas and displaced farmers were given farms similar to those they had lost. Despite this policy of reconstructing the pre-war situation, we find that forced migration increased the likelihood of leaving agriculture, which in turn led to a large increase in long-term income among the displaced rural population. By contrast, being displaced decreased the income of the resettled urban population. We examine the extent to which these effects can be explained by the impact of forced migration on farm quality, education, networks, learning, and discrimination, but find only limited support for the relevance of these mechanisms. Instead, we argue that a Roy model augmented with habit formation for residential location provides the most compelling rationalization for these results.

JEL Classification: J61, O15, N34