Rural-urban migration with remittances and welfare analysis

Abstract

Given the growing importance of rural-urban migration with remittances to rural development and urban income inequality, this paper proposes a theoretical model to investigate unskilled migration with remittances and the relevant welfare implications. Migrants remit part of their wage incomes to support their families of origin out of distinct motivations. The adequate explanation for this behavior may be “enlightened self-interest.” Alongside that, we introduce the mental cost of migration, which means that both migrants and remaining members suffer when migrants leave their families and generate the utility loss. We then construct a modified Melitz model with these ingredients to examine the urbanization process and corresponding welfare issues. The results show that when the remittance increases, it will enlarge the inequality between entrepreneurs and migrant workers. Moreover, when the trade cost is relatively small, the average utility level of migrant households is increasing in the remittance rate. Finally, we employ a numerical approach to simulate the optimal remittance rate and compare the results of different scenarios.