Migration, Policy, and Formation of Cities

Efficient allocation of resources is the cornerstone of market economy, and migration of people is an elementary part of the allocation mechanism. This paper presents a simple club theoretic model of migration between cities. In the model, welfare in a city depends on its size, and people migrate between cities in seek for welfare gains. Migration alone can produce stable and efficient market solutions only under very special circumstances. In general, the mechanism must be supplemented by collective optimization of population by local policy. In the most realistic case of heterogeneous cities centralized policy interventions are necessary to secure efficiency. The results about the effects of centralized policy somewhat contradict the conventional wisdom. First, administrative and economic policy measures (quantity restrictions and lump sum transfers, respectively) differ in their effects, and second, lump sum transfers actually motor up rather than stabilize spatial evolution.