Migration and risk: an empirical application to the coca economy in Peru

This paper studies the growth of the Peruvian illegal coca economy as a result of the migratory process. The paper describes peasant attitudes towards migration as a portfolio decision making process, where peasants allocate labor to the coca fields or the urban sector according to relative earnings and risk structure. The empirical estimation, using data on wages and risk factors (i.e. political violence) for the coca region and Lima, shows that migration to the coca sector is an economically rational decision. using log-linear and non-linear specifications, it is shown that wage differentials and political violence in the coca region and the urban sector are significant in affecting migration to the coca sector. Unemployment in the urban sector shows an inconclusive effect. The variables used, although they seem to have non-stationary properties, are cointegrated and therefore validate standard inference procedures. A simple test of stability of the parameters shows that they do not change significantly through time.