Yu Na Lee is a PhD Candidate in the Department of Applied Economics at the University of Minnesota; she is currently on the job market.
Internal migration from rural to urban areas is key to economic development—it reallocates labor from the agricultural to the manufacturing sector, causing a structural transformation (Timmer 1988). In many developing countries, rural-to-urban migration persists even when one’s expected income in urban areas is lower than in rural areas. One explanation is that income risk aversion can motivate this kind of migration (Katz and Stark 1986), which becomes a strategy households rely on to manage income risk (Stark and Levhari 1982; Rosenzweig and Stark 1989).
In my job-market paper, I hypothesize that migration can also be a strategy to manage price risk, i.e., uncertainty in the price of agricultural commodities, which can reduce welfare both directly, by itself, and indirectly, via income fluctuations (Sandmo 1971; Turnovsky et al. 1980; Barrett 1996; Bellemare et al. 2013). I test my hypothesis using data from the Ethiopia Rural Household Survey (ERHS), and find that households with greater levels of price risk aversion—as distinct from income risk aversion—are more likely to see their members migrate to urban areas. Mine is the first paper to examine the impact of commodity price volatility on migration.
Why Price Risk Matters
Why does price risk matter? The indirect utility function is perhaps the handiest measure economists have to look at welfare. Indirect utility functions are defined over an individual’s income as well as over the vector of prices she faces. The curvature of the indirect utility function in the income dimension is directly related to the Arrow-Pratt measures of risk aversion: it tells us how the individual is affected by variability in her income.
Similarly, using Arrow-Pratt-like measures of price risk aversion, we can measure the curvature of the indirect utility function for each price and each pair of prices. These tell us how the individual is affected by the variability of each price as well as the co-variability between each pair of prices.
Why should price risk induce rural-to-urban migration? There are two reasons. First, agriculture constitutes a substantial part of economic activity in developing countries, both in terms of production and consumption. In sub-Saharan Africa, especially, a higher share of the population depends on agriculture for its livelihood than in any other region, and budget shares of food are much higher than elsewhere.
Second, food price volatility—or food price risk—can be harmful for both producers and consumers of agricultural commodities in developing countries, where insurance and credit markets are thin or nonexistent, and where markets that can offer cheap substitutes for staples are often unavailable when food prices soar.
Price Risk Aversion and Willingness to Pay for Price Stabilization
In order to measure the price risk aversion of the households in my data, I rely on the measure of willingness to pay (WTP) for price stabilization derived and estimated by Bellemare et al. (2013).
Because it measures how much a household is willing to pay to stabilize the prices of the most important agricultural commodities in the ERHS data, Bellemare et al.’s WTP measure effectively captures household price risk aversion as a function of two things: (i) household preferences, and (ii) household price risk exposure.
I use this WTP as my variable of interest. Because this WTP is a function of household- and market-level factors, it varies not only between households in each round, but also within each household across rounds. Moreover, if WTP > 0, a household is price risk-averse; if WTP = 0, it is price risk-neutral; and if WTP < 0, it is price risk-loving.
My dependent variable is a binary variable measuring whether any household member migrated to an urban area since the last survey round.
The data cover 5,621 household-round observations. The average household is price risk-averse and would be willing to give up about 9 percent of its income in exchange for stabilization of key food commodities at their mean price.
Given my binary dependent variable, I estimate a linear probability model controlling for district-round fixed effects and find the following:
- Higher levels of price risk aversion are associated with an increased likelihood of sending household members to urban areas. A one standard deviation increase in the WTP for price stabilization is associated with 1 percentage point increase in the likelihood of having household members who migrated to urban areas since the last survey round. This is about a 30 percent increase from the baseline of 3.4 percent of households sending members to urban areas. This finding is robust to falsification tests, alternative definitions of WTP and migration, including fixed effects pertaining to different geographical levels, and nonlinear specifications. This finding implies that migration is a price risk management strategy and can complement the theory of migration as an income risk management strategy.
- This significant relationship between the WTP and migration is more pronounced in the villages that lack daily markets, producer co-ops, and programs such as food aid, food-for-work, and cash-for-work. In other words, this relationship is more pronounced where fewer strategies to cope with price risk are available to the household.
The findings in my job market paper are important for development policy. Ethiopia is among the least urbanized countries in the world, but there has been a consistent increase in the share of urban population over the past half century, and the level of urbanization is expected to increase further in the future. Governments in Ethiopia and in other developing countries, however, have implemented conflicting policies, ranging from encouraging rural-to-urban migration to restricting it (Lall et al. 2006). Knowing that price volatility is a likely source of rural distress and a potential driver of migration, policies aimed at promoting market activities and enhancing access to social safety nets may improve the welfare of rural households.
These findings are also important for food price stabilization policies that have been used as an important policy instrument in a number of developing countries, especially after the global food crisis of 2007-08. If migration is an indication of negative welfare impacts of price volatility, policies designed to decrease food price volatility can lead to welfare gains if they focus on (i) areas lacking daily markets and food assistance programs, and (ii) specific commodities that influence migration.
Limitations and Next Steps
Coming up with an exogenous measure of price volatility or attitudes towards price volatility is intrinsically challenging. I rely on observational data and a measure of WTP that was estimated structurally, which means that a number of assumptions had to be made to derive that measure (McBride 2016; Bellemare et al. 2016). My job-market paper is a first step in the study of the relationship between price risk and migration, beyond which there is scope to use (quasi) experimental methods to improve causal identification.