THE IMPACT OF LOCAL FISCAL AND MIGRATION POLICIES ON HUMAN CAPITAL ACCUMULATION AND INEQUALITY IN CHINA

Abstract We develop and estimate a spatial overlapping generations model with heterogeneous households to study the feasibility of a recently proposed reform of internal migration policies that offers the potential of decreasing inequality within China. We find that this policy change significantly increases the college attainment of migrant children born in rural areas and, therefore, promises to increase the number of high‐skill workers. However, it requires significant tax increases to offset the reduction of the positive fiscal externalities provided by migrants.