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

We use a research design created by forced migrations to examine the costs and benefits of leaving agriculture in mid-20th century Finland. After World War II, 11% of the Finnish population were resettled from areas ceded to the Soviet Union. Entire rural communities were moved to locations that resembled the origin areas, and displaced farmers were given land and assistance to establish new farms. Despite this policy of reconstructing the pre-war situation, forced migration increased the likelihood of switching to non-agricultural jobs and moving to urban areas. Consequently, forced migration also increased the long-term income of the displaced rural population. By contrast, forced migration decreased the income of the resettled urban population. We examine the extent to which these effects can be explained by the quality of the new farms, human capital investments, networks and discrimination but do not find evidence supporting these mechanisms. Instead, we argue that habit formation towards residential locations provides the most compelling rationalization for our results.