Illegal Immigration and Fiscal Competition

Reflecting recent enforcement policy activism of US states, this paper examines federal-state overlap of illegal immigration policy in a spatial context. Keeping the US-Mexico context in mind, we assume that labor from a source nation enters a host nation through bordering states. Once in the host, illegal immigrants may stay in the state of entry or move to another state. The host nation's federal government and/or the state governments choose border and internal enforcement policies, and also provide local goods. As a benchmark, we define the completely centralized solution as the case where the federal government chooses all the policies, while the state governments are passive. At higher levels of decentralization (i.e., as states take more responsibility in deciding some of the policies), the overlap of federal and state policies is associated with both vertical and horizontal externalities. Among other results, we find that if inter-state mobility is costless, internal enforcement is overprovided, and border enforcement and local goods are under-provided under decentralization, leading to relatively high levels of illegal immigration. While inter-state migration costs moderate such overprovision/under-provision, extreme levels of inter-state immobility may lead to too little illegal immigration, and an overprovision of local goods.