Explore by…

More

Networks and Misallocation: Insurance, Migration, and the Rural-Urban Wage Gap

Download paper


We provide an explanation for the large spatial wage disparities and low male migration in India based on the trade-off between consumption-smoothing, provided by caste-based rural insurance networks, and the income-gains from migration.

We provide an explanation for the large spatial wage disparities and low male migration in India based on the trade-off between consumption-smoothing, provided by caste-based rural insurance networks, and the income-gains from migration. Our theory generates two key empirically-verified predictions: (i) males in relatively wealthy households within a caste who benefit less from the redistributive (surplus- maximizing) network will be more likely to migrate, and (ii) males in households facing greater rural income-risk (who benefit 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.