Making a Narco: Childhood Exposure to Illegal Labor Markets and Criminal Life Paths

What explains the development of illegal markets and criminal careers in developing countries? I exploit the timing of a large anti-drug policy that shifted cocaine production to locations in Peru that were well-suited to growing coca. In these areas, children harvest coca leaves and transport processed cocaine. Using administrative data, I show that individuals exposed to illegal markets during childhood are 30% more likely to be incarcerated for violent and drug-related crimes as adults. The biggest impacts on adult criminality are seen among children who experience high coca prices in their early teens, the age when child labor responds the most. No effect is found for individuals that grow up working in places where the coca produced goes primarily to the legal sector, suggesting that it is the accumulation of human capital specific to the illegal industry that fosters criminal careers. However, consistent with a model of parental incentives for human capital investments in children, the rollout of a conditional cash transfer program that encourages schooling mitigates the effects of exposure to illegal industries, providing further evidence on the mechanisms. Finally, I show how the program can be targeted to take into account the geographic distribution of coca suitability and spatial spillovers. Overall, this paper takes a first step towards understanding how criminals are formed by unpacking the way in which crime-specific human capital is developed at the expense of formal human capital in "bad locations."