This paper is now published in Econometrica.

Abstract

This paper provides evidence that exposure to illegal labor markets during childhood leads to the formation of industry-specific human capital at an early age, putting children on a criminal life path. Using the timing of US anti-drug policies, I show that when the return to illegal activities increases in coca suitable areas in Peru, parents increase the use of child labor for coca farming, putting children on a criminal life path. Using administrative records, I show that affected children are 30% more likely to be incarcerated for violent and drug-related crimes as adults. No effect in criminality 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, 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.