The Role of Risk Aversion in Rural Household Migration Decisions: The Case of Indonesia

Hillary Caruthers, University of Wisconsin-Madison

This paper investigates the role of risk in rural-to-urban migration decisions using Indonesian household-level panel data. Specifically, I use wage data and measures of household risk aversion to test whether rural to urban migration is a means of managing risk among uninsured rural households via the diversification of household income flows. Previous studies of risk aversion and migration do not analyze the migrant’s choice of destination but instead focus on the relationship between risk aversion and the likelihood of migration; however, if migration is motivated, in part, by household risk management, then the level of risk aversion should impact both the propensity to migrate and the destination of migration. In this paper I generate predictions regarding the relationship between household risk aversion and the riskiness of receiving regions (i.e. variance of receiving wages and correlation of home and receiving income) and test these predictions using a multinomial logit estimation.