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Human Capital Allocation and Policy Intervention when there is Externality in Cities


  • Neville N. Jiang

    () (Department of Economics, Vanderbilt University)

  • Rui Zhao

    () (University of Illinois)


This paper studies the allocation of skilled and unskilled workers with different human capital levels between locations: city and rural area. In the city, activities are congregated thus there is externality in production. In rural area production is spread out and no externality exists. Given a distribution of workers with various human capital levels in an economy, the social optimal allocation gathers workers with higher human capital in each category in the city, which all competitive equilibria fail to achieve, As a result, any policies that keep workers with low human capital out of the city increase total output. We further demonstrate that in some cases it is necessary to impose direct and selective barrier on the rural-urban migration. However, such policy maintains the city premium for unskilled labor. Great incentives exist for illegal rural-urban labor flow.

Suggested Citation

  • Neville N. Jiang & Rui Zhao, 2003. "Human Capital Allocation and Policy Intervention when there is Externality in Cities," Vanderbilt University Department of Economics Working Papers 0325, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:0325

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    More about this item


    city externalities; human capital distribution; migration;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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