Production Subsidy/tax Policy on Foreign Direct Investment in the Presence of Urban Unemployment and Labor Migration

Abstract

We set up a simple two sector, two factor Harris-Todaro model in which home and foreign duopolists compete in a Cournot-Nash way in the urban sector, while the rural sector is perfectly competitive. We introduce a cost asymmetry between home and foreign firms and a spillover of production technology from the foreign firm to the home firm. We then study the effects of the production subsidy/tax policy of the government for the duopolists on the urban unemployment, migration between urban and rural sectors and the welfare of the host country. JEL Classification: F11, F12, F16