The Choice of Technology and Rural-Urban Migration in Economic Development

This paper studies a general equilibrium model of rural-urban migration in which manufacturing firms engage in oligopolistic competition and choose increasing returns technologies to maximize profits. Urban residents incur commuting costs to work in the Central Business District. Surprisingly a change in the size of the population or an increase in the exogenously given wage rate will not affect a manufacturing firm¡¯s choice of technology. This helps to explain why firms in developing countries may not adopt labor intensive technologies even under abundant labor supply. An increase in the number of manufacturing firms increases both the employment rate and the level of employment in the manufacturing sector. However, manufacturing firms choose less advanced technologies. Capital accumulation leads manufacturing firms to choose more advanced technologies, but may not increase employment in the manufacturing sector.