Efficient urban bias

Abstract

We present a theory of the allocation of rural and urban government services in the presence of household migration to the city. Assuming policy makers cannot directly allocate households across rural and urban regions, we find there are circumstances where a second-best efficient allocation of government services is independent of the relative weights the policy maker places on the welfare of rural and urban households. An ‘efficient’ urban bias ensures that wages are maximized for urban and rural households and that migration to the city is not excessive. Thus, inequities in the provision of government services are not necessarily a sign of political favoritism. In these circumstances, a second public policy instrument is needed to effect redistribution in favor of urban households. A ‘redistributive’ urban bias takes the form of restricting migration flows to the city and not in altering the allocation of government services.