Rural - Urban migration of family labor: A portfolio model

In this paper we develop a family-based rural to urban migration model and offer an alternative explanation of urban underemployment to the well-known Harris-Todaro (H-T) model. We assume that the risk-averse family allocated its members to the rural, urban formal and urban informal sectors so as to maximize the expected family utility. Rural and urban informal sector incomes are assumed to be stochastic and potentially correlated creating an incentive for families to place members in the urban informal sector to reduce the variance of aggregate income. The spatial allocation or migration problem thus coincides with the portfolio choice model in finance. A major finding of the paper is that conventional policy wisdom, derived from the individualistic, expected-income maximizing H-T model no longer holds true in the family-based 'portfolio' migration model.