Selection and Heterogeneity in the Returns to Migration

There is considerable debate on the returns to rural-urban migration in developing countries, and magnitudes differ depending on the empirical methods used. We aim to reconcile these divergent estimates by explicitly accounting for the role of heterogeneity in the returns to migration. We develop a correlated random coefficient model that allows for location-specific skills and heterogeneous returns, estimated using rich longitudinal data from Indonesia, China, and Tanzania. This model lets us extrapolate the returns identified from switcher sub-populations to non-switchers---a group of particular interest to policymakers deciding whether to encourage migration as a development strategy. Our results reveal considerable heterogeneity in the returns to migration and show a clear pattern in the relationship between absolute and comparative advantage across countries: those with the lowest productivity in rural areas stand the most to gain from migrating. This suggests that migration is a pro-poor strategy but that barriers to migration may prevent workers from realizing their potential. As such, individuals appear to be inefficiently sorted across space; therefore, encouraging migration could lead to large returns.