ECON 448: Week 11-
1. Rural and Urban: Migration
(1) What is the Todaro paradox?
(2) A tiny country of Avalon has a total labor force of 20 workers. These workers can produce two goods: manufactures (M) and food (F). The labor demand functions are as follows.
wM = 200 - 10LM, wF = 150 - 5LF
a. Assuming that the labor market is flexible, find the wages and the labor force distribution in the competitive equilibrium.
b. Assume that a minimum wage of $150 is imposed in the manufacturing sector. Also, the wage in informal sector (wt) is $50. Workers are free to migrate according to the Harris-Todaro model. Find the wages and the labor force distribution.
c. Suppose that the government provides a subsidy for every worker who works in either sector, and restricts the migration of workers without a manufacturing job. Find the level of subsidy s such that the wage and worker distribution are the same as the flexible equilibrium.
(3) Are the following statement true, false or uncertain?
a. Migration restrictions alone lead to too many people in the informal sector.
b. In the Harris-Todaro model, an increase in the formal sector labor demand at a fixed wage rate must lower the percentage of people in the informal sector, as a fraction of the urban labor force.
(4) (Risk Aversion and Migration Decision) Suppose that you are deciding whether or not to migrate to the city. A formal job pays $1000 whereas a informal job pays $200. Only 10% of the urban labor force participates in the formal sector. If you are risk-neutral, what is maximum rural wage that makes you migrate? At this wage, what would a risk-averse worker do?
2. Land: Rental Contracts
(1) When tenant inputs are unobservable (or unverifiable), what kind of tenancy is the most efficient one (in perspective of the social planner)? Why is sharecropping tenancy so common?
(2) Are the following statement true, false or uncertain?
a. The most efficient land rental contract is one in which the landowner creates as much incentive as possible for the tenant to exert the maximum level of effort.
b. A fixed-rent contract is always efficient because it does not distort the tenants' incentives.
c. If the credit market is perfectly functioning, efficiency can be achieved even if all other markets fail.
d. In an economy with extensive possibilities for perfect crop insurance, fixed rent tenancy must be dominant irrespective of whether potential tenants are risk-averse or risk-neutral.
e. If the tenants are risk-averse, a fixed-wage contract is always efficient because it provides full insurance for the tenants.