Factor mobility and migration models

Abstract

This chapter introduces into the theory of labor and capital movements between regions or countries. Movements of other mobile factors, in particular knowledge, are not dealt. After an introduction defining terms, it explains the basic factor mobility model assuming perfect competition and full factor price flexibility. Particular emphasis is given to the welfare results: Who are the winners and losers if factors are allowed to move and under what conditions does free mobility increase overall efficiency? We show how factor allocations deviate from an efficient outcome if the markets do not work perfectly. After studying factor mobility in a static framework, we extend the analysis to a dynamic framework. It is needed because investment decisions are forward looking. Investors compare present expenditures with present values of future returns. The same holds true for migration because migrants invest into human capital when they expend migration cost today in order to earn a higher income in the future. In a final section, we study the role of factor mobility in New Economic Geography. A concluding section points to further topics not dealt with in this chapter.