Abstract
A two-sector economy has a central city linked to a Thünen-like rural sector by a Harris-Todaro labor-market clearing mechanism. The government collects a tax to pay for urban manufacturing infrastracture and rural transportation infrastracture. Additions to the urban infrastracture reduce the area under cultivation, cultivation, reducing pressure on frontier forests; rural wages rise and urban unemployment falls; the endogenous tax rate rises. Transportation improvements move urban unemployed into agriculture, raise rural wages, and expand the cultivated area, causing deforestation along frontiers; the tax rate falls, benefiting fixed-wage urban workers. Coalitions of interest groups are identified for several types of development policy.
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