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Abstract

This paper extends the literature on poverty traps and regional economics by incorporating rural-urban migration, human capital externalities, and regional agglomeration effects into Galor and Zeira’s (1993) overlapping generations model to examine the welfare impacts of various person-based and place-based policies. We formalize the conditions that may induce a rural brain-drain. The model is calibrated and simulated to demonstrate how regions with different production and housing technologies may respond differently to a given policy. Our results show that for certain parameter values, well intended policies targeting poor households may instead worsen their longrun welfare outcomes if households prefer not to migrate to the wealthier urban region when awarded an education subsidy. In other cases, person-based policies are shown to improve the long-run welfare of poorer households by facilitating migration to the city. Place-based policies that enhance rural firm productivity without targeting individual households may yield higher average welfare for rural residents. In some instances, the benefits of place-based policies may not trickle down to less wealthier households, whereas in other cases, they are more effective than the subsidy program in improving the welfare of the poorest.

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