Should Governments Promote or Slow the Pace of Urbanization? A Quantitative Analysis of the Internal Migration Restrictions in China

Abstract

Should governments promote or slow the pace of urbanization? In this paper, we provide the first estimate of the welfare effect of the hukou policy restricting internal migration in China by using a general equilibrium framework that incorporates agglomeration externalities and congestion forces. We find that removing migration restrictions in the largest cities would have 1) increased the national welfare by allowing more people to move into more productive locations, and 2) decreased the local welfare by pushing the population sizes over their locally optimal sizes. These results reveal a fundamental conflict between local and national interests in terms of desired population sizes.

Keywords: Urbanization; externalities; optimal city sizes; migration policies; hukou system

JEL Classification: R12; R13; R23; O18