This paper develops a theoretical framework to simulate expansion of non-farm businesses and population in rural areas. It follows the new economic geography modeling approach with a focus on the role of urban land rents in limiting the sustainability of agglomeration in the urban region. In most new economic geography models such centrifugal forces cause dispersion of people and firms that leads to emergence of new cities. In this model, households make residential choices and move to rural areas surrounding the urban region. This increases demand for goods and services in the rural region and hence makes firms to follow households. While the business location decision improves employment prospects in the rural region, a good proportion of households may keep their jobs in the city and hence commute between the two regions. This explains the current trends of rural in-migration and linkages between urban and rural regions with a focus on complementary relationship between migration and commuting.
