On an Optimal Selective Migration Policy when Information is Asymmetric and Incentives Count

We study the policy of selecting incoming migrants when the receiving country’s own welfare guides the choice of policy, when the receiving country’s decisions are made under informational asymmetry, and when migrants differ in their skill levels. Selection can be achieved via the levying of a proportional tax on migrants’ earnings. We calculate the optimal tax when human capital is fixed (“a fixed human capital framework”), and in the presence of an incentive to form human capital (“an adjustable human capital framework”). In contrast to the fixed human capital framework, in the adjustable human capital framework the tax policy of the receiving country cannot be divorced from the behavior of the skilled workers at origin: there is a trade-off between selecting high skill migrant workers and generating tax revenue on the one hand, and the possibly detrimental reaction with respect to the incentive to invest in skill acquisition on the other hand. The level of the tax that the receiving country will choose is sensitive to the calculus of the workers who form human capital in the sending country. The absence or presence of a skill formation response matters for establishing the impact of a selection policy on the welfare of the natives of the sending country. We find that there are instances in which the sending country experiences an aggregate increase in welfare upon selection, even though the tax is selected in order to maximize the welfare of the natives of the receiving country.