Rural-urban migration and economic growth in developing countries. Society for Economic Dynamics 2004 Meeting Paper 241

This essay extends the standard Ramsey-type growth model to include a capital market failure and households ’ endogenous residency decisions in a regional, multi-sectoral environment. In this environment, households decide to migrate, or not, from rural to urban region depending not only on the income differences across regions, but also on the cost-of-living differentials per unit of expenditure per household in each region. Income differentials arise due to the segmentation in labor and capital markets across regions, allowing for different rates of return on these factors of production, and cost-of-living differentials stem from the existence of non-tradeable goods in each region. We find that segmentation in rural and urban capital markets may help explain the uneven growth across regions and the rapid rates of migration in developing countries