Heterogeneous Firms, Heterogeneous Labourers, Rural-Urban Migration and the Effect of Change in Cost of Migration

Abstract In this paper we set up a theoretical model of labour migration by extending the basic Harris Todaro (1970) model to incorporate the recent empirical findings on migration. We consider a closed developing economy with a dual structure. The urban formal sector has heterogenous firms producing varieties similar to the Melitz (2003) framework but with skill, wage and quality hierarchy. There is an urban informal sector producing an inferior good and a rural sector producing an essential good. The labourers are heterogeneous as well and there is both skilled and unskilled migration. Finally, in this structure we observe the effect of an infrastructural development policy in the form of reduction in fixed cost of migration. We find that both the sectors in the urban area expands while the rural sector shrinks. Furthermore, both skilled and unskilled migration increases. So, encouraging migration through infrastructural development by reducing cost of migration is beneficial as it leads to urbanisation. JEL Classification: J24, J61, L22