The Welfare Economics of Rural-To-Urban Migration: The Harris-Todaro Model Revisited

In this paper we extend the Harris-Todaro model of rural-to-urban migration to include urban agglomeration effects, some urban real wage flexibility, and a government budget constraint. Without employment subsidies laissez-faire migration is excessive unless real wage flexibility and agglomeration effects are high. Laissez-faire migration is too low compared with the first-best outcome supported by a subsidy, if its financing involves no costs. Simulations suggest that such a program would imply a substantial increase in taxation. If, as seems likely, an increase of this magnitude involves economic costs then the optimal outcome falls well short of first-best.