The Welfare Implications of Internal Migration Restrictions : Evidence from China

What are the welfare implications of placing restrictions on internal migration? Given externalities in location choices, the answer is ambiguous. This paper empirically examines what is presumably the largest government intervention in internal migration in human history--the Hukou system in China. Using a dynamic spatial equilibrium framework and restricted-use census data, we find that completely removing Hukou-related migration restrictions between 2000 and 2010 would have resulted in an approximate 8%-18% increase in GDP and welfare. The presence of externalities results in a conflict between national and local interests: while it would be beneficial to remove all Hukou restrictions from the national perspective, natives in the most desirable cities would suffer losses. This implies that optimal spatial policies need to incentivize the more desirable cities to accommodate an even larger population