Real Options Approach in Migration for two Specific Labor Markets

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Title: Real Options Approach in Migration for two Specific Labor Markets
Author: Sengupta, Bhaswati
Advisors: John J. Seater, Committee Chair
Abstract: This work uses a real options approach to model the migration decision of an individual under very specific labor market conditions where migration is analyzed as a "regime switching" phenomenon. A regime switching model is developed with the possibility of exogenous regime switches, the latter being an innovation of this work. The first migration decision analyzed is that of an individual considering migration from a rural to an urban labor market that is segmented in nature, consisting of a formal and an informal sector, a common phenomenon observed in many developing countries. A combination of exogenous regime switches are used in the model for an accurate treatment of the "opportunity nature" of finding formal employment once the migrant is in the city. The model also analyzes the value to a migrant of the option to move back and forth between the rural and urban sectors, which is new to the rural-urban migration debate. The exogenous switching formulation developed in this work may be used to model a wide variety of such economic phenomenon where a common dynamic programming problem is augmented to include the possibility of an opportunity arising, that an economic agent may or may not take. The second problem developed along similar lines concerns the decision of a prospective undocumented Mexican migrant crossing the border to work in the U.S. This model is solved numerically using parameter values obtained from data and qualitative policy prescriptions as suggested by the model are presented. Results suggest that the effectiveness of the INS to modify the probability of apprehension in the interior of the U.S. has a much bigger effect than apprehension at the border in deterring undocumented migration. Also, a decreasing probability of acquiring legal status inside the U.S. does not have a very big effect in deterring migration as compared to increasing border and interior apprehension probabilities or even raising the cost of being an undocumented worker in the U.S.
Date: 2003-08-05
Degree: PhD
Discipline: Economics

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