A Signal(-Jamming) Theory of (Non-)Brain Drain

Abstract

The traditional Hechscher-Ohlin theory fails to explain the brain drain problem in which high talent immigrants flow from less developed countries to developed countries. This paper offers an interpretation of the brain drain paradox with a signaling model. We show that in a North-South two-country modified Spence model where countries have identical endowment but asymmetric education systems result in brain drain. In particular, we assume that there are 3 types of agents according to their unobservable intrinsic abilities: high, medium and low; education (with endogenous intensity) consists of two stages: undergraduate and graduate. Education improves productivity and the return is increasing with respect to abilities. It is further assumed that the South has a state owned education sector which implements its employment rate target by mandatory enrollment expansion, while in the North, the education sector is fully market driven. There are two types of jobs: entry level and managerial, in which workers' true ability is detected with higher probability in the former. We then show that the education levels (intensities) and tuitions are lower in both undergraduate and graduate levels in the South. Furthermore, under some conditions, the equilibrium is semi-pooling, in which the medium type chooses to work after undergrad education while (a fraction of) both high and low types pursue graduate studies at home and abroad. Some proportions of both high and low abilities return to work at source country in equilibrium but high ability agents are relatively fewer. Hence working at North after overseas studies partially signals one's ability and therefore results brain drain. However, the brain drain here is a departure of the traditional definition where only high talent goes abroad. Indeed, some low ability agents also go abroad in equilibrium and work after graduation, resulting the recipient country hiring low ability ones, or non-brain drain.