Tariff-induced capital inflow and welfare in the presence of unemployment and informal sector

The co-existence of rural-urban migration and persistent urban unemployment is a common feature in developing countries, In this paper we draw on the Harris-Todaro model and extend it to include an urban informal sector where the product of the informal sector is used as an industrial input in the u rban formal sector. We derive and contrast various welfare effects of tarif f-induced capital inflow. Also, we analyze the welfare implications of empl oyment subsidy as the policy instrument in the presence of international ca pital mobility. (C) 2001 Elsevier Science B.V. All rights reserved.