Love Thy Neighbor: Trade, Migration and Social Capital

Abstract:     
Standard trade theory suggests indifference between free trade and free migration as both lead to factor price equalization. Rich countries, however, prefer free trade to free migration. This inconsistency can be explained by incorporating the impact of social capital. The movement of people differs from the movement of goods and services because people create attachments with those with whom they share social capital, including norms, language, customs, values and culture. South-North migration affects social capital in both places. Four types of externalities associated with migration are identified. The paper develops a parsimonious model and examines the impact of trade and migration policy (and changes in migration costs) under alternative assumptions about the internalization of these externalities. Irrespective of the degree of internalization of externalities, the South gains from trade liberalization and from preferential access to the North, and the North gains from immigration controls. The likelihood that the South gains from free migration increases with the degree of internalization of the externalities.

Number of Pages in PDF File: 31

JEL Classification: F11, F13, F22, J61

working papers series