Migration, Integration, and Development
We re-examine the Lewis undermigration by studying a two-sector model in which there is a trade-off between higher productivity in the modern sector and better information in the traditional sector. The consequent presence of well-functioning local insurance markets in the traditional sector and their absence in the modern sector leads to the possibility of inefficient undermigration: total social surplus would be increased if migration were larger than its laissez-faire level; whether this occurs depends in part on the distribution of wealth. In a dynamic version of the model, modernization of the economy may be too slow, and it is possible that the economy gets stuck in an undermigration trap (never fully modernizes). The migratory dynamics also lead to well-defined dynamic relations between average income and inequality. We find that although the Kuznets inverted-U curve may arise, it is equally likely that the relation of inequality and income follows other patterns, including an upright U.
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