Munshi, K. and Rosenzweig, M.

Networks and misallocation: insurance, migration, and the rural-urban wage gap

American Economic Review

Vol. 106(1) pp. 46-98 (2016)

Abstract: We provide an explanation for the large spatial wage disparities and low male migration in India based on the trade-o between consumption-smoothing, provided by caste-based rural insurance networks, and the income-gains from migration. Our theory generates two key empirically-veried predictions: (i) males in relatively wealthy households within a caste who benet less from the redistributive (surplus-maximizing) network will be more likely to migrate, and (ii) males in households facing greater rural income-risk (who benet more from the insurance network) migrate less. Structural estimates show that small improvements in formal insurance decrease the spatial misallocation of labor by substantially increasing migration.

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Publisher's Link: http://dx.doi.org/10.1257/aer.20131365