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JEL Classification:

B59, C61, F22, O15

Abstract

Recent empirical works using bilateral flows data find no evidence regarding the effect of average domestic income on migration, suggesting that some features in the sending economy should be analysed in depth. We propose a novel theoretical framework where forward looking behavioural agents decide the optimal migration time. In this model we highlight the role of loss aversion and domestic income mobility to explain migration decision. Under these conditions and without assuming credit constraints in the origin country, the domestic-foreign income gap is neither a necessary nor a sufficient condition to have migration. Our model is consistent with recent empirical findings. The paper establishes three main results. Firstly, we demonstrate that a jump in intra-generational domestic income mobility postpones departure choice. Secondly, we show how a very tight exogenous immigration policy cannot completely prevent people from migrating, if there are some individuals far below the reference point. Thirdly, we generalise self-selection, showing that migrants could negatively select into migration despite a higher skill premium abroad, because intra-generational domestic income mobility is larger for skilled individuals.

Keywords

International Migration, Loss Aversion, Real Option, Relative Deprivation