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Faculty of Economics


Munshi, K. and Rosenzweig, M.

Networks and Misallocation: Insurance, Migration, and the Rural-Urban Wage Gap


Abstract: We provide an explanation for the large spatial wage disparities and low male migration in India based on the trade-off between consumption-smoothing, provided bycaste-based rural insurance networks, and the income-gains from migration. Our theory generates two key empirically-verified predictions: (i) males in relatively wealthy households within a caste who benefit less from the redistributive (surplus-maximizing)network will be more likely to migrate, and (ii) males in households facing greater rural income-risk (who benefit more from the insurance network) migrate less. Structural estimates show that small improvements in formal insurance decrease the spatial misallocation of labor by substantially increasing migration.

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Published Version of Paper: Networks and misallocation: insurance, migration, and the rural-urban wage gap, Munshi, K. and Rosenzweig, M., American Economic Review (2016)

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