In this master thesis I intend to study opium production in Afghanistan, and identify important drivers behind the opium production. The main aim is to test whether or not Afghan opium production is debt-induced.
A claim often found in the literature on Afghan opium production is that the production of opium is debt–induced. In the first part of the thesis I provide a theoretical rationale for why this is the case, using a dynamic model of the cropping choice of a utility maximizing household. The main finding is that optimal effort devoted to opium production is increasing in the level of debt.
In the second part of the thesis I describe the data set, and put up correlation tables for opium production and debt. The findings are consistent with the literature — the conditional probability of producing opium given debt is significantly higher than the conditional probability of producing opium given non-negative wealth.
But correlation does not necessarily imply causation. In the third part of the thesis I therefore estimate reduced form versions of the theoretical model, calculating the choice probabilities for different cropping strategies. Here the findings diverge from the literature — when controlling for price incentives, eradication risk, social class, and regional-specific fixed effects, the conditional probability of producing opium is independent of debt.
To explain this finding I, in the final part the thesis, show that heterogeneity in moral costs may create two subpopulations of opium farmers. The first, the “opportunists”, produce opium for the unrivalled profit, while the second, the “moralists”, produce opium out of necessity. Utilizing the theoretical model with moral costs, I find that the “moralists” either will produce opium at maximum capacity or not at all, while the “opportunists” will have a production level somewhere in between. Taking this into account when calculating choice probabilities, our model fits the data better: for the “moralists” debt is an important determinant of opium production, while for the “opportunists” debt is unimportant.