Internal and External Migration in Iceland 1960-94: A Structural Model, Government Policies and Welfare Implications

Abstract

This paper aims at analyzing migration patterns in Iceland. A model that explains individuals' migration decisions is constructed and then used to estimate the cost associated with relocating and how the shocks that drive migration are divided between common and idio-syncratic terms.The model that explains individuals' migration decisions solves a lifetime utility maximization problem using dynamic programming. This turns out to be infeasible for the problem at hand using standard methods since there are an order of magnitude too many state variables. A method is developed to circumvent this by focusing on only a part of the state vector. The structural parameters of the model are estimated using the method of simulated moments.The results are used to analyze the efficiency and welfare effects of government actions aimed at keeping marginal areas populated.