Sectoral Migration and Industrial Diversification: Role of Behavior and Expectations

Abstract

This paper explores the link between migration and industrial diversification. Economic theories of migration typically focus on wage differential across sectors as the primary explanatory variable. In this paper instead we focus on the behavioral aspects of the agents, which may lead to different levels of migration resulting in different degrees of specialization and industrial congregation. We analyze the related issue of industrial diversification in a two sector set up with one traditional sector which is technologically saturated and an upcoming sector where there is a lot of scope for technological improvements. It is the entrepreneurial nature of the agents, rather than the wage difference, that drives the migration which in-turn helps in technological advancement of the upcoming sector. In this context we compare the equilibrium level of migration and the socially optimal level of migration. The level of migration, and hence, industrial specialization or diversification, are decided not only by the behavioral aspects but also the expectations. Expectations and the optimizing behavior of the agents are crucial in deciding the final level and the speed with which economies reach the steady state.