DP1229 | Migration and the Option Value of Waiting

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31/08/1995

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Abstract

Migration is an investment: it involves fixed, unrecoverable costs and uncertain future returns. If migration can be postponed, the option value of doing so may have positive value. Migration may not occur for a range of individuals who would otherwise migrate on a net present value basis. This paper models the migration decision using ideas developed by Pindyck (1991) and Dixit (1992). The option value of waiting is related to the interest rate, fixed costs, and especially uncertainty governing the evolution of income at home and abroad. The `bad news principle' predicts that only unfavourable states of the world will affect the value of the migration option. In a rational intertemporal equilibrium of two regional labour markets, low migration rates may coexist with large or even increasing current wage differentials.