Inter-Jurisdiction Migration and the Fiscal Policies of Local Governments

Authors: Darong Dai, Dennis W. Jansen, Liqun Liu Date: February 2019

Working Paper 1901

In this paper, authors Darong Dai, Dennis W. Jansen and Liqun Liu analyze the effects of migration on the fiscal policies of local governments.  Because of the possibility of migrating to another jurisdiction later in life, and as a result, not being responsible for the debt repayment in one's original jurisdiction, the residents in a jurisdiction have a tendency to run excessive debt. This paper first analyzes a fiscal-policy game between two jurisdictions connected by mutual migration and finds that as the mutual migration intensifies, both jurisdictions in the Nash equilibrium choose more public consumption, less public investment, and more total spending that is entirely financed by debt.  Results also show that the first-best allocation can be achieved through Nash play by imposing the restriction that public consumption should be financed by a contemporary tax and not by borrowing. The paper goes on to analyze a model with one-directional migration and obtain results on how migration affects the fiscal policies of both the jurisdiction of migration destination and the jurisdiction of migration origin.

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Keywords: local government debt, migration, fiscal externalities, debt limits