Harris-Todaro model
1-Suppose the rural wage is $1 per day Urban modern sector
employment can be obtained with 25 probability and pays $3 per day The urban
traditional sector pays 40 cents per day
-Will be any rural â?”urban or urban â?”rural as
things stand? Explain your reasoning, stating explicitly any simplifying assumptions,
and show all work
-What would be the urban traditional sector daily income
have to be to induce no net rural â?” urban migration? If wages in all
sectors are inflexible, what else adjusts in this model to lead the equilibrium
( be specific â?” how much does it adjust and what is the intuition)?
2Suppose that potential rural-urban migrant would work for
two periods ( of some length) in either the rural or the urban area In this
first period, she has 15% chance of getting a modern job, which pays $4 per
day In the second period, her chance of getting this job rises to 50%, if she
has been there in the first period (learning about the job market)
However , the present value of $1 received in second period
is just $50, ie the discount factor is 5
The urban informal wage is 0 The rural wage is $1 per day
Will she migrate( in the first period)? Show how you arrived at your answer