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Journal of Demographic Economics (2019), 85, 271–303

doi:10.1017/dem.2019.10

R E S E A R C H PA P E R

Optimal education policy and human capital

accumulation in the context of brain drain†
Slobodan Djajić1*, Frédéric Docquier2,3 and Michael S. Michael4
1
Graduate Institute, Geneva, Switzerland, 2LISER, Luxembourg Institute of Socio-Economic Research,
Belval, Luxembourg, 3FNRS and IRES, Université Catholique de Louvain, Louvain-la-Neuve, Belgium and
4
Departement of Economics, University of Cyprus, Nicosia, Cyprus
*Corresponding author. E-mail: [email protected]

(Received 26 September 2018; revised 12 June 2019; accepted 13 June 2019)

Abstract
This paper revisits the question of how brain drain affects the optimal education policy of
a developing economy. Our framework of analysis highlights the complementarity
between public spending on education and students’ efforts to acquire human capital in
response to career opportunities at home and abroad. Given this complementarity, we
find that brain drain has conflicting effects on the optimal provision of public
education. A positive response is called for when the international earning differential
with destination countries is large, and when the emigration rate is relatively low. In
contrast with the findings in the existing literature, our numerical experiments show
that these required conditions are in fact present in a large number of developing
countries; they are equivalent to those under which an increase in emigration induces a
net brain gain. As a further contribution, we study the interaction between the optimal
immigration policy of the host country and education policy of the source country in a
game-theoretic framework.

Keywords: Education policy; immigration policy; migration of skilled workers

JEL classifications: F22; J24; O15

1. Introduction
Migration of skilled labor from the developing to the advanced countries has been the
subject of extensive research over the last four decades. Efforts to measure these flows,
including the works of Docquier and Marfouk (2006), Artuc et al. (2015), and Arslan
et al. (2015), indicate that skilled emigration, as a proportion of the economy’s skilled
population, is particularly large in the case of relatively poor and small developing
†
This paper benefited from the helpful suggestions of three anonymous referees. It was initiated when
the first author was visiting the Department of Economics of the University of Cyprus. Slobodan Djajić
wishes to thank the Department for its hospitality and support. Frédéric Docquier acknowledges
financial support from the EOS programme of the Flemish (FWO) and French-speaking (FRS-FNRS)
communities of Belgium (convention 30784531 on “Winners and Losers from Globalization and Market
Integration: Insights from Micro-Data”).
© Université catholique de Louvain 2019

countries. Island economies, as well as countries in Central America, sub-Saharan

Africa, and South-East Asia, exhibit the highest skilled-emigration rates.1 Availability
of new migration data has triggered renewed interest in assessing the costs and
benefits that these migration flows generate for developing countries.2 At the same
time, however, policy implications of the brain drain have been understudied.
This paper investigates the effect of skilled emigration on the optimal education
policy of developing countries. Given that the cost of education and training
represents a disproportionate financial burden for such economies [Lucas (2005)],
the exodus of skilled workers can be expected to induce education-policy responses.
In a number of studies, it has been argued that skilled migration reduces the optimal
level of public education [see Justman and Thisse (1997), Stark and Wang (2002),
Docquier et al. (2008), Poutvaara (2008)]. This argument is based on the notion that
skill-biased emigration prospects increase the expected benefits of education and
decrease the gap between the social and private returns to education.
Our paper revisits this issue by hypothesizing that the production of human capital
results from a combination of two complementary inputs, namely students’ efforts to
accumulate human capital and the provision of public education. In our framework,
the quality of education is determined by the amount of public expenditures per
student [as in Fernandez and Rogerson (1998)], which affects both the quantity and
the productivity of educational inputs. This includes teachers’ quality, which is
commonly perceived as a key determinant of education outcomes [e.g., Tamura
(2001); Hanushek (2013)]. Hence, in the context of our model, an increase in public
education expenditures raises the marginal return to schooling and increases student
effort (or enrolment in education). This is in line with Oketch and Somerset (2010),
who show that the higher provision of public education in Kenya in 2003 increased
enrolment rates in many schools, or with Blankenau and Camera (2009), who study
the complementarity between public education quality and students’ efforts to
acquire productive skills.
Highlighting this complementarity is particularly relevant when considering the
problem of investment in education in poor developing countries, where credit
markets for the purpose of funding private education are underdeveloped and, as
noted by the World Bank (2000, p. 54), higher education systems are heavily
dominated by public universities with the costs falling predominantly on the state.3
Hence an important distinction between our framework of analysis and that of
earlier studies is with respect to the conditions under which a potential migrant
accumulates human capital. Previous contributions address the problem under the
assumption that education is privately funded, with agents having access to credit
markets [as in Mountford (1997), Docquier et al. (2008), Bertoli and Brücker
(2011)], or facing liquidity constraints [as in Beine et al. (2008), Docquier and
Rapoport (2012)], while the role of the authorities is to set the level at which they

1
Rates of over 80% are reported for several Caribbean and Pacific nations and they exceed 50% in some
African countries.
2
See Commander et al. (2004) and Docquier and Rapoport (2017) for surveys of the various issues and
evidence related to the brain drain.
3
The financing of higher education in developing countries has been largely borne by the government
through tax financing with very little or zero costs borne by students [World Bank (2010), p. 5]. Teferra
(2007) notes that in virtually all sub-Saharan countries, the state provides over 90% of the support for
higher education.

subsidize the optimally-chosen private expenditures on education. We assume instead

that only fully subsidized public education is available, as in Wong and Yip (1999).
Instead of deciding on how much money to invest in acquiring education, students
in our model optimally choose their study effort as a function of their academic and
occupational opportunities, while the authorities choose the level of expenditures on
education so as to maximize the net national income.
Our primary objective is to characterize the relationship between the optimal
amount of public education and the (exogenous) emigration flow of skilled workers.
We subsequently extend the model to account for the endogeneity of the
immigration policy of the (rich) host country. This enables us to study
the interaction between the optimal immigration policy of the host country and the
optimal education policy of the source country and to examine the comparative
statics properties of the Nash political equilibrium.
There is already a large and growing literature on skilled emigration and human
capital formation.4 One strand of this literature shows empirically that incentives for
human capital accumulation in developing countries are based, to a significant
extent, on migration opportunities. Using data on 127 developing countries, Beine
et al. (2008) estimate that a doubling of a country’s emigration rate of highly-skilled
workers is associated with a 20% increase in the long-run stock of human capital
possessed by its nationals, including emigrants. Their findings suggest that under
certain conditions the stimulus to skill formation may be strong enough to bring the
economy’s stock of human capital to a higher level in the post-migration
equilibrium. Studies by Chand and Clemens (2008) on Fiji, by Gibson and
McKenzie (2011) on Tonga and Papua New Guinea (2011), by Batista et al. (2011)
on Cape Verde, by Shrestha (2017) on Nepal, or by Theoharides (2017) on the
Philippines provide micro-level evidence of a positive impact of emigration on the
net stock of human capital in the source country.
Closer to the theme of our paper, the effect of skilled migration on education policies
has been addressed in several theoretical contributions. Justman and Thisse (1997)
study the effect of labor mobility on local public funding of education. In a
fiscal-competition framework with multiple jurisdictions, they show that the mobility
of highly-skilled workers reduces the incentives for public spending on education
and leads to global under-investment in human capital. In the same vein, Djajić
et al. (2012) determine the optimal education policy in a non-cooperative framework
with homogenous agents where the source-country government sets the level of
public education subsidies and the host-country government sets the level of
restrictions on cross-border mobility. Other studies examine the optimal
education-policy response to the brain drain within the framework of a small-open
economy. Stark and Wang (2002) explore how migration and education subsidies
may substitute for one another and be optimally combined as policy tools. They
demonstrate that, by allowing a certain proportion of highly-skilled individuals to
emigrate to a richer country, the government of the home country can stimulate
expected returns to schooling so as to obtain the socially desirable level of human

4
Some of the early contributions to this literature include Bhagwati and Hamada (1974), Djajić (1989),
Miyagiwa (1991), Mountford (1997), Wong (1997), Stark et al. (1997), Vidal (1998), and Wong and Yip
(1999). See also Klein and Ventura (2009), Benhabib and Jovanovic (2012), Ortega and Peri (2014), di
Giovanni et al. (2015), and Docquier et al. (2017, 2018) for more recent analysis of the welfare
implications at the global level.

capital without having to rely on education subsidies. More precisely, emigration

prospects and education subsidies can be substituted one for the other as policy tools
in order to boost education investment to its optimal level. Docquier et al. (2008)
revisit this argument by assuming that the source-country government is concerned
about the number of educated individuals remaining in the home country as well as
fiscal distortions induced by the education policy. Poutvaara (2008) develops a
similar model where the possibility of brain drain distorts the provision of public
education away from internationally transferable education (e.g., exact sciences,
engineering, economics, medical professions) and toward country-specific skills (e.g.,
law, humanities), with the source country possibly ending up training too few
engineers and too many lawyers.5 One common feature of these studies is that the
optimal level of education spending decreases with the size of the brain drain. A
confirmation of this is provided by Docquier et al. (2008), who find a negative
relationship between skilled emigration rates and the levels of public per-student
spending on tertiary education using data covering 108 middle-income and
low-income countries.
Our investigation proceeds in three steps. In section 2, we solve for the equilibrium
levels of educational spending and students’ effort in the source country under autarky.
In section 3, we open the economy to migration and assume that higher wages per unit
of skill are available abroad. Given the complementarity between students’ efforts to
acquire human capital and public spending on education, skilled emigration has an
ambiguous effect on the optimal provision of public education. On the one hand, it
reduces the social return to education spending, as a fraction of the
domestically-produced human capital benefits a foreign rather than the home
country. On the other hand, it increases the marginal productivity of public spending
on education as students’ effort increases. To assess the relative importance of these
two opposing forces, we parameterize our model on 120 developing countries. Our
calibrated model matches a set of country-specific characteristics as well as the
average elasticity of human capital formation to skilled migration estimated in Beine
et al. (2008). Numerical experiments that we conduct show that the second effect
dominates in a large number of countries. Under the benchmark calibration and
assuming that the authorities do not care about emigrants’ income abroad, skilled
emigration increases the optimal level of public spending on education as well as the
time spent in education by students in 33% of our sample. More precisely, public
education spending and skilled migration act as complements (rather than
substitutes) in countries where the international earning differential with
high-income destinations is large and when the emigration rate is relatively low
(what we refer to as a “low migration” or LM equilibrium). A marginal increase in
skilled emigration from these countries can be expected to have a positive impact on
the net stock of human capital. Still, the optimal amount of public spending
increases proportionately less than the number of hours spent in education by
students. Hence, the average amount of public expenditure per hour of education
decreases, which is in line with the empirical findings in Docquier et al. (2008).
In section 4, our third step consists of analyzing the interaction between the optimal
immigration policy of the host country and the optimal education policy of the source
country. In this game-theoretic framework, we compute the Nash political equilibrium

5
Poutvaara (2008) also demonstrates that such a negative outcome could be avoided by introducing
graduate taxes or income-contingent loans for students to be (re)paid in case of emigration.

and examine the implications of (i) a reduction in the cost of providing educational
services in the source country, (ii) a shift in preferences on immigration in the host
country, and (iii) a change in the degree of international transferability of human
capital. Our focus is on the amount of effort exerted by students in school, the
optimal level of source-country spending on education, and the optimal immigration
quota of the host country in the Nash equilibrium. One of our findings is that in an
LM equilibrium, an increase in the international transferability of human capital
entails an expansion of the immigration quota of the host country and an increase in
spending on education in the source country. By contrast, in a “high-migration”
(HM) equilibrium, defined as an environment in which a higher emigration rate
reduces the economy’s net stock of human capital, an increase in the transferability
of human capital may entail a reduction in spending on education by the source
country. We conclude the paper in section 5 by highlighting its principal contributions.

2. Optimal education policy under autarky

We consider a small developing country, S, producing a single commodity with the aid
of skilled labor. It provides education to its citizens with the view of maximizing its
GNP, net of expenditures on education. After completing studies, some of the
graduates may be able to migrate to an advanced country F, depending on the
regime governing international migration. Before considering the implications of
labor mobility, however, let us begin by defining the environment facing individuals
and the authorities in S under autarky.
Consider the problem of an individual in a closed economy. Her lifetime consists of
two phases of given durations. In the first phase, she is supported by her parents and
has to decide on how to optimally divide her time, normalized to unity, between leisure,
l, and study effort, z. The skills acquired in the first phase affect her income and
consumption in the second phase. Utility is derived from leisure, l, in this first
(formative) phase and consumption of commodities, C, in the second (career) phase
according to a separable utility function U(l,C) = v (l) + u (C). We adopt the standard
assumptions: v ′ (l) > 0, v ′′ (l) ≤ 0, u ′ (C) > 0, and u ′′ (C) < 0. By investing more of her
time in education, a student can acquire more skills, H, which allows for a higher
income and consumption, C, in the second phase. More precisely,

C( H(z, 1),

w, z, 1) = w (1)

where w is the real wage in S per unit of skill (or efficiency labor) acquired by the
student and ε is the level of educational services dispensed by the authorities of S.
Only public education is available and it is provided to students free of charge
[see Glomm and Ravikumar (1998, 2003), Glomm and Kaganovich (2003)]. We
assume that Hz > 0, Hε > 0, Hzz < 0, Hεε < 0, and Hzε > 0. The labor market is
perfectly competitive and there is full employment.
The optimization problem of a student is to

max v(1 − z) + u(

wH(z, 1)), (2)
z

and ε as given. The first-order condition reads:

taking w

− v′ (1 − z) + u′ (C)
wHz (z, 1) = 0, (3)

which provides an implicit solution for the optimal study effort, z, as a function of ε and
, per unit of skill. This relationship implies that the effect of the
the real market wage, w
wage on study effort is positive, assuming that the elasticity of marginal utility of
consumption, θ = −u ′′ (C)[C/u ′ (C)], defined to be positive, is less than unity:

u′ (C) ∂C
∂z (u − 1)
= w ∂z
2 > 0,
∂
w ∂C ∂2 C
v′′ (1 − z) + u′′ (C) + u′ (C) 2
∂z ∂z

as both the denominator and the numerator are then negative. Only if θ<1, does the
(or any other
substitution effect dominate the income effect, so that an increase in w
exogenous change that generates a higher level of future income) induces students to
exert more effort in acquiring human capital. On the basis of evidence documented
in the literature on risk aversion and labor supply behavior, we consider this to be
the relevant case. As for the effect of ε on student effort, we have

∂C ∂C ∂2 C
∂z u′′ (C) + u′ (C)
=− ∂z ∂1 ∂z∂1 ,
2
∂1 ∂C ∂2 C
v′′ (1 − z) + u′′ (C) + u′ (C) 2
∂z ∂z

where the denominator is unambiguously negative, while the two terms in the
numerator have conflicting signs: both (∂C/∂z) (∂C/∂ε) and ∂2C/∂z∂ε are positive,
while u ′′ (C) < 0 and u ′ (C) > 0. Let us consider the case of iso-elastic utility functions

(1 − z)(1−x) C (1−u)
v(1 − z) = , u(C) = (4)
(1 − x) (1 − u)

and assume that

H(z, 1) = m1b z g , (5)

where μ > 0 is a parameter reflecting the efficiency of the skill-formation technology,

β ∈ (0, 1), and γ ∈ (0, 1).6 We can then write

∂z z(1 − u)b
= z > 0,
∂1 1 1 − g(1 − u) + x
1−z

6
There is an extensive literature on the positive relationship between educational inputs that correspond
to ε (such as teacher quality and class size) and the skill level of students (reflected in their test scores and
even subsequent earnings). By contrast, we have not been able to find documented evidence on the
relationship between study effort of students taking part in a given educational program and their
productivity or earnings after graduation, which would provide us with information regarding γ. The
impact of study effort is obviously difficult to measure in a student population as it consists of inputs
such as time and the degree of mental concentration, while its effectiveness depends on a range of other
parameters and personal characteristics of a student.

indicating that if the authorities choose to provide a higher ε, this triggers more effort
on the part of students. As one would expect, the elasticity of z with respect to ε is
positively related to the elasticity of H(z, ε) with respect to both z and ε, but
negatively related to the degrees of concavity, χ and θ, of the utility functions in the
first and second phases of the planning horizon, respectively. Higher degrees of
concavity of the utility functions make students less responsive to educational and
occupational opportunities under autarky and, as we shall see in the next section, to
migration opportunities in an open economy. This is an important point as most of
the literature on the impact of migration opportunities on skill formation in a
developing country with an endogenous educational policy is based on the
assumption that the utility function is either logarithmic or linear.7
In sum, in the context of our model with endogenous study effort, the skill level of an agent
depends positively on ε through two channels: one direct and another indirect, through the
interaction between the education policy of the authorities and the study effort, z, optimally
chosen by each student. We thus have H(1, z( w, 1)), with dH/dε = ∂H/∂ε + (∂H/∂z) (∂z/∂ε),
where the first term is the direct effect and the second term corresponds to the indirect
“effort” effect, both being positive.
In a closed economy, the objective of the authorities is to maximize GNP, net of
official expenditures on education. We assume that the marginal product of a unit of
efficiency labor is constant at the level determined by the technology of production
and institutional arrangements in S. Each of the country’s N citizens is assumed to
go through the educational system, receiving ε units of training. From the
perspective of the authorities, we take the per-student cost of providing an extra unit
of training to be a constant x. Education is assumed to be funded by collecting taxes
in a way that does not distort the decision of students with respect to the optimal
study effort, z. An example might be a tax on land, real-estate, or a tax on royalties
in the mining industry or other resource-based activities.
In an autarky regime, signified by the superscript a, we can write the objective
function of the authorities as

L − Nx1,
Va = w (6)

where w is the exogenously-given marginal productivity of a unit of efficiency labor and

L is the stock of skilled labor, measured in efficiency units:

L = NH(1, z (
w, 1)). (7)

7
Changes in the stock of human capital in response to greater migration opportunities arise in this
literature through a very different mechanism. Students are assumed to be heterogeneous in terms of
ability, with higher ability students facing a lower cost of acquiring human capital [as in Mountford
(1997), Beine et al. (2008), Docquier and Rapoport (2017)]. A higher probability of migration in that
context raises the expected payoff from owning human capital, inducing a larger number of individuals
(including those with a marginally lower ability) to acquire it. Our focus on students’ effort is motivated
by the observation that the input expected of a student in the higher-education systems of poor
developing countries tends to be predominantly study effort rather than a monetary payment.

Maximizing V a with respect to ε requires that

dL

w = Nx. (8)
d1

On the basis of equation (7), we have

dL ∂z
= N H1 + Hz > 0. (9)
d1 ∂1

Thus, maximization of V a with respect to ε implies that

∂z
H1 + Hz
w = x, (10)
∂1

so that x, the marginal resource cost of an extra unit of training is equal to the marginal
contribution of a unit of training, taking into account both its direct effect on skill
formation and the indirect effect through its influence on students’ effort.8

3. Optimal policy with immigration quotas

Let us now open our economy to international migration. The advanced foreign
country, F, is assumed to differ, when compared with S, in terms of the technology
of production and institutional structures that render the marginal productivity of
labor in F higher than that in S.
Although migration from S to F is now possible, it is not unrestricted. We shall
assume that F sets its optimal immigration quota that allows only M ≡ pN workers to
immigrate and become permanent residents, where p is the fraction of skilled
workers from S that can be admitted in F.9 Since all workers in S are identical, they
are all equally productive [as in Vidal (1998), Stark and Wang (2002), Docquier
et al. (2008)]. We can then think of migrants as being selected on the basis of a
8
Our model abstracts from the analysis of public-goods provision beyond educational inputs. In a
broader setting with multiple public goods, additional spending on education implies that less is
available for the provision of other public goods. This can have an impact on national welfare. What we
implicitly assume is that the net marginal benefit of additional spending on other public goods is nil. If
we were to assume instead that it is positive due to limits on the amount of resources available to the
authorities, optimal expenditure on education would require that the expression on the LHS of (10) be
equal to x plus that positive amount.
9
Djajić et al. (2012) also consider a two-country model where the source country sets its optimal
education policy and the host country sets its immigration policy. The focus of that article, however, is
on temporary migration, with the host country choosing the optimal duration of the work permit. The
source country provides education to its citizens, taking into account that those who migrate
temporarily will also improve their skills abroad and contribute to an increase in the domestic stock of
human capital from the date of their return until retirement. Thus the host-country policy of setting the
duration of a migrant’s stay abroad has a fundamental influence over the optimal education policy of
the source country. These elements do not play a role in the present study as we are considering the
problem of permanent migration with F’s policy instrument being the number of migrants admitted
rather than the duration of each migrant’s stay. Moreover, the present study has a more solid micro
foundation as it considers explicitly the optimization problem of a potential migrant. Djajić et al. (2012)
assume that student effort is exogenous.

lottery and allocated to employers in F also on the basis of a lottery. Let us assume, in
addition, that skills are not perfectly transferable from S to F, so that a migrant with the
skill level H gets credit for only ϕH units of skill in the labor market of F, where ϕ ≤ 1.
Moreover, the immigration policy of F is designed to benefit the country’s employers. In
some countries, including the rapidly-growing East-Asian economies, as well as in many
of the labor-importing countries in the Middle East, regulations allow foreign workers to
be systematically underpaid in relation to native workers.10 In other economies, such as
the United States, the underpayment is more subtle, although it can be quite substantial.
As noted by the former Secretary of Labor, Robert B. Reich, in the early days of the H1-B
program, “We have seen numerous instances in which American businesses have brought
in foreign skilled workers after having laid off skilled American workers, simply because
they can get the foreign workers more cheaply” [Branigin (1995)].11 In what follows, we
shall assume that while the natives earn w*, foreign workers earn only (1 − σ) w* per unit
of transferable skills, where σ < 1 is an exogenous parameter of the model. Having
specified the conditions facing potential migrants abroad, we derive in section 1 the
optimal level of public spending on education in the source country and investigate
how it varies with the immigration quota of the host country. In section 2, we
parameterize the model and proceed to a set of numerical experiments for 120
developing countries.

3.1 Theory
In an open-economy framework, the optimization problem of a student becomes

max v (1 − z) + E [u(C)], (11)

where E [u(C)], the expected utility of consumption of a representative student in S at

the beginning of the planning horizon, is given by

p
E [u(C)] = [w∗ (1 − s)fH (1, z(w, 1, p, w∗ , s, f))](1−u)
1−u
1−p
+ [ w, 1, p, w∗ , s, f))]1−u ,
wH (1, z(
1−u

10
Migration programs in these countries are often negotiated at the bilateral level between the host and
source countries, with compensation of foreign workers set to generate benefits for both the migrants and
their employers. Bilateral agreements between Japan and the Philippines, Japan and Vietnam, and Japan
and Indonesia governing migration of nurses or bilateral agreements between Saudi Arabia and the
Philippines, Singapore and Indonesia, or Singapore and the Philippines in the domain of domestic
helpers are examples of such arrangements.
11
U.S. employers apply for H-1B visas even though they pay a fee to the U.S. government in order to
obtain a visa. This suggests that H-1B workers are paid lower wages than native workers with the same
productivity level. Hira (2010, p. 11) reports that “…paying H-1Bs below-market wages is quite
common. According to the U.S. Citizenship and Immigration Services (USCIS)… the median wage in
FY2008 for new H-1B computing professionals was $60,000, a whopping 25% discount on the $79,782
median for U.S. computing professionals… approximately half of the 58,074 H-1B computing
professionals admitted in FY2008 earned less than entry-level wages for computer scientists” [see also
Usher (2001)]. Although the underpayment of any given foreign skilled worker is likely to be over just a
limited period of time, it nonetheless generates a rent for the employer. To simplify our analysis, the
employer’s-rent component is assumed to be a fraction of a foreign worker’s lifetime earnings.

which depends on p ≡ M/N, the probability that a skilled graduate in S will be able to
H(1, z(.)). We naturally assume
migrate to F and earn w*(1 − σ)ϕH (ε, z(.)) instead of w
that w∗ (1 − s) f > w . Note that once we allow for the possibility of working in F, z
becomes a function of not only w and ε, as under autarky, but it also depends on
the probability of ending up abroad, M/N, and on the conditions in the foreign labor
market, as reflected in w*, σ, and ϕ.
Maximizing (11) subject to (12) and assuming that the marginal utility of leisure is
constant (i.e., χ = 0),12 we have

(1−u)
w(1−u) + p[w∗ (1 − s)f](1−u) ](m1b )
1
z = {g[(1 − p) }1−g(1−u) . (13)

When S is open to emigration, let us assume that the aim of the authorities is to
maximize the contribution of skilled labor to the economy’s output, net of
educational expenditures, not taking into account the earnings or welfare of those
who work abroad. In making this assumption, we follow the mainstream of the
literature on the brain drain [Vidal (1998), Stark and Wang (2002), Docquier et al.
(2008)]. A notable exception is Bertoli and Brücker (2011), where the weight
attached by the authorities of the source country to the utility of migrants is a
parameter of the model. We thus have:

V =w w, 1, M/N, w∗ , s, f)) − Nx1.

(N − M)H (1, z ( (14)

For a given M, the optimal education policy of S must satisfy the following condition:

∂V ∂z
(N − M) H1 + Hz
; V1 = w − Nx = 0. (15)
∂1 ∂1

In comparing equation (15) with (10), we immediately notice that (N − M) < N,

which
implies that the optimal provision of educational services must be such that
∂z
H1 + Hz is larger when migration is permitted. This, however, does not
∂1
necessarily call for a lower ε. As we shall see below, an increase in the educational
efforts of students following the opening of the economy to emigration will, for a

12
This assumption makes the algebra more tractable in the analysis below. Note that the larger is χ,
the smaller is the effort response of students to incentives for human capital accumulation. This is
because a larger χ makes it more difficult to give up leisure in exchange for future expected utility of
consumption as the level of study effort increases. Thus, by assuming that χ = 0, the effect of a
change in ε or expected future earnings on z [and therefore H(ε, z)] is larger than in the case where
the marginal utility of leisure is diminishing. In what follows, we shall assume that χ = 0, while
noting that this stacks the cards in favor of the outcome that an increase in migration opportunities
results in an increase in the net stock of human capital of the source country. At the same time, our
assumption that the marginal product of skilled labor is constant in the source country stacks the
cards in the opposite direction. It keeps the source-country wage constant, rather than allowing it to
rise [see Mishra (2007)] with an increase in emigration and hence provide greater incentives for
human capital accumulation.

V1 w (1 − p)bH
; − x = 0, (16)
N 1[1 − g(1 − u)]

and the second-order condition is satisfied as

∂V1 ∂z ∂2 z
(N − M) H11 + Hz1 + Hz 2
; V11 = w (17)
∂1 ∂1 ∂1

(N − M)H b [b − 1]
w
= < 0. (18)
12 [1 − g (1 − u)]

Moreover, we have:
⎡ ⎤
∂z
∂ H1 + Hz
∂V1 ⎢ ∂1 ∂z ⎥
; V1M ⎢
=w⎣(N − M) − H1 + Hz ⎥
∂M ∂M ∂1 ⎦

bH
w (N − M)gD
= − 1 _0,
1[1 − g(1 − u)] M [1 − g(1 − u)]

where 0 < Δ < 1 is the expected period-two gain in the utility of a skilled worker
stemming from being born in S when S is open rather than closed to international
migration, divided by the expected period-two utility of a skilled worker when S is
an open economy:

[w∗ (1 − s)f]1−u 1−u

w
p −
(1 − u) (1 − u)
D(p) ; 1−u
< 1. (20)
∗
[w (1 − s)f] 1−u
w
p + (1 − p)
1−u 1−u

In what follows, we shall refer to Δ as a skilled worker’s “normalized” utility gain of

being in an open economy rather than in one closed to international migration.
According to (19), in response to an increase in M, it may be optimal for the
authorities of S to spend either more or less on education, depending on the

By using (4) and (5) and assuming that χ = 0, we can write ∂(H1 + Hz (∂z/∂1))/∂z = bgmz g−1 1b−1 +
13

bgmzg−1 1b (1 − u)/1[1 − g(1 − u)] + bgm(g − 1)zg−1 1b (1 − u)/1[1 − g(1 − u)] = bgmzg−1 1b /1[1 − g
(1 − u)] > 0.

parameters of the model. An increase in ε is the optimal response if

(N − M)gD ( p)
G(p) ;
M[1 − g(1 − u)]
[w∗ (1 − s)f]1−u 1−u
w
(1 − p)g −
(1 − u) (1 − u)
= 1−u
> 1. (21)
∗
[w (1 − s)f] 1−u
w
[1 − g(1 − u)] p + (1 − p)
1−u 1−u

Alternatively, if Γ(p) < 1, it is optimal for S to spend less on education following an

increase in M.
As w∗ (1 − s)f > w , G(p) is clearly a decreasing function of p, such that Γ(1) = 0 and
g w∗
G(0) = [(1 − s)f]1−u − 1 +1. We thus have:
1 − g(1 − u) w
Proposition 1 If Γ(p) is greater (less) than unity, then the optimal expenditure on
education in S increases (decreases) with an expansion of immigration opportunities in
F. Two possible configurations can be obtained:
(i) If Γ(0)<1, emigration always decreases the optimal level of public education spending;
this condition holds if the international earning differential and γ are small.
(ii) If Γ(0)>1, emigration up to a certain critical rate p̃, such that G(p̃) = 1, increases the
optimal level of public spending. If p exceeds this critical rate p̃, emigration always
decreases ε.
From (21), the critical value p̃ is positively related to the international earnings
differential w∗ (1 − s)f/ w and to the elasticity, γ, of the human-capital production
function with respect to the amount of study effort expended by a student. Both a
larger wage differential and a bigger γ provide students with a stronger incentive to
accumulate human capital in response to an increase in migration opportunities. On
the other hand, the critical value of p is inversely related to θ, the degree of
concavity of the utility function. A larger θ makes students’ effort in school less
sensitive to occupational opportunities later on in life.
In sum, an increase in official spending on education in S is more likely to be the
optimal response to an expansion of an immigration quota in F, (i) the smaller is the
skilled emigration rate, (ii) the greater is the international earnings differential,
w∗ (1 − s)f/ w, (iii) the greater is γ, and (iv) the lower is θ. An expansion of
migration opportunities can then have a large impact on the effort of students in
school, as well as a large impact on their subsequent productivity at the workplace. It
then pays for the authorities of S to raise ε, considering the fact that when p is
small, the vast majority of students will end up in the labor market at home. In
section 4 below, we shall refer to an environment in which Γ(p)>1 and hence VεM >
0, as a low-migration (LM) equilibrium and the opposite case in which Γ(p)<1 and
VεM < 0 as a high-migration (HM) equilibrium.
If we compare these findings with those reported in the key contributions to the
literature, such as the work of Beine et al. (2008), we find strong similarities with
respect to the role of the emigration rate and the international wage differential in
determining whether a country enjoys a net increase in its stock of human capital.
Beine et al. (2008) assume, however, that education is privately funded, with the cost
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Journal of Demographic Economics 283

of acquiring a standard unit of human capital dependent on an agent’s innate ability.

This brings into the analysis the distribution of ability within the population and the
question of whether or not a person interested in acquiring human capital is
liquidity constrained. In our model with publicly-funded education and students of
identical abilities, these factors do not play a role. The question is, instead, how do
education authorities and students react to an expansion of migration opportunities,
which in turn depends in our model on θ, β, and γ.

3.2 Quantitative assessment

Our theoretical analysis shows that the education policy response to the brain drain, ε
(p), is ambiguous. In this section, we apply quantitative theory to a set of 120
developing countries around the year 2010, and identify the cases where the optimal
level of public education spending increases or decreases with emigration. We
distinguish between structural parameters (θ, β, γ) that are assumed to be common
to all countries, and other parameters (p, w, w*, σ, ϕ, μ, x) that exhibit some country
variations. For a given set of parameters, the equilibrium of our model is a triplet of
endogenous variables (H, z, ε) that solves three conditions, namely equations (5),
(13), and (16). As a by-product of this equilibrium, the level of human capital of a
resident skilled worker can be written as h ≡ H (1 − p). We explain below how we
confront the theoretical model to real-world data, by successively discussing its
parameterization, the benchmark results, and their robustness.

3.2.1 Calibration
Practically, our calibration method consists of three steps. First, we assign values to
common parameters (θ, β, γ) relying on the existing literature. As far as the
concavity of the utility function is concerned, estimates of θ vary significantly,
depending on the data used and the empirical strategy. Chetty (2006) examines some
of the factors that explain this wide range of estimates, and reports that the mean
estimate in the literature is θ = 0.7. We use this value as a benchmark. Although our
assumption that θ < 1 may be viewed as somewhat restrictive, it is motivated by (i)
the fact that only three out of the 33 estimates of θ reported by Chetty (2006) are
above unity, and (ii) the observation that, within the present model, a value of θ > 1
implies counterintuitive and empirically unsupported results.14 As for the human
capital technology, Glomm and Ravikumar (1998, 2003) and Glomm and
Kaganovich (2003) consider a specification with a unitary elasticity of human capital
to the individual effort, and an elasticity to public education ranging from 0.05
to 0.30. In line with these studies, our benchmark calibration assumes γ = 1.0 and
β = 0.15. The latter elasticity is in line with Card and Krueger (1992), who find an
elasticity of human capital to school quality of 0.12. Other values are used in the
robustness checks (see Table 1 below).
The second step of our parameterization strategy consists of swapping two observed
endogenous variables for which country-specific observations exist, ε and H, for two
unobserved exogenous variables, μ and x. Hence, we collect data on observables
(p, w, w*, σ, ϕ, ε, H) and calibrate the level of the unobservable variables (z, μ, x)

From (13), θ > 1 implies that students in developing countries reduce their efforts to accumulate
14

w, ∂z/∂w∗ < 0), or in

human capital in response to an increase in the local and foreign skill prices (∂z/∂
response to a rise in education quality (∂z/∂ε < 0).

that are compatible with the data by backsolving the system (5)–(13)–(16). In particular,
we substitute με β by Hz −γ from (5) into (13) and obtain

w1−u + p(w∗ (1 − s)f)1−u H 1−u ,
z = g (1 − p)

which allows us to identify the level z for each country. Then, when z is known, we
calibrate μ to match H from (5): this gives μ = Hε −βz −γ. Finally, we calibrate x to
match data for ε using (16):

w (1 − p)bmz g
x= .
[1 − g(1 − u)]11−b

As far as data collection is concerned, we use proxies that capture the size of the
brain drain and decisions of the highly educated population. Hence, p is proxied
with the fraction of college-educated natives that emigrated to one of the OECD
destination countries in the year 2010; the data are taken from the DIOC database
described in Arslan et al. (2015). As for income variables, we use data on GDP per
capita in 2010 (y) from the Maddison project, data on the wage ratio between college
graduates and the less educated (s) from Hendricks (2004), and data on the
proportion of college graduates in the labor force (h) from Barro and Lee (2013).
The average income of college graduates is then computed as sy/(hs + 1 − h) for all
developing countries and for the United States. We then compute the income ratio
between the United States and each developing country, and compare it with the
data on international earnings differentials between the United States and a set of 42
developing source countries covered by the study of Clemens et al. (2009). On
average, the latter is 5% smaller. For our 120 countries, we thus use the adjusted
ratio [i.e., 0.95sy/(hs + 1 − h)] as a proxy for w*(1 − σ)ϕ, and we normalize the
domestic wage w to unity. Regarding ε, we use the 2010 amount of public education
spending as the percentage of GDP provided in the WDI database (World
Development Indicators). Finally, H is proxied with h(1 − p)−1 and is meant to
represent the fraction of college graduates in the native (i.e., before-migration)
population.15
The third step is the validation one. Step 2 uses all the degrees of freedom of the data
to identify the needed parameters. Consequently, our model is exactly identified and
cannot produce a test of its assumptions. In order to establish the relevance of our
identification method, we examine whether our calibrated model is in line with the
empirical (brain gain) literature on skilled emigration and human capital formation.
We simulate shocks on p (equalizing p with the emigration rate of less educated
workers, pmin), and compute the elasticity of H to p as dlnH/dlnp for each country.
The empirical paper of Beine et al. (2008) provides an estimate of 0.05 for the
short-run elasticity, and an upper-bound of 0.20 for the long-run elasticity. In our
benchmark calibration, we obtain a mean level of dlnH/dlnp of 0.08, which implies
15
Assuming that human capital is proxied by the fraction of college graduates, we implicitly consider that
the less educated have no productive skills, and that GDP per capita is proportional to the fraction of
college graduates in the labor force. Although this simplifying assumption looks strong, the observed
elasticity of GDP per capita to the fraction of college graduates is close to unity [as shown in Docquier
et al. (2017)].

that our model matches very well the sensitivity of pre-migration, human capital
formation to migration.

3.2.2 Benchmark results

Using the calibrated model, we simulate the value of dε/dp for each developing country.
At the current level of brain drain (p), equation (21) says that this derivative is positive
if Γ(p) − 1 > 0. In this case, sending an additional high-skilled migrant abroad increases
the optimal level of public education. The derivative can also be evaluated at p = 0. If it
is positive [i.e., if Γ(0) − 1 > 0], this means that a small level of brain drain pushes the
government to increase ε compared to a closed economy situation. Figure 1(a)
provides the values of Γ(p) − 1 (on the vertical axis) and of Γ(0) − 1 (on the
horizontal axis) for all countries in our sample. As Γ(p) is decreasing in p, all points
are below the 45 degree line. We identify 81 countries (67% of the sample) for
which both Γ(0) − 1 and Γ(p) − 1 are negative. In these countries, increasing
emigration always reduces the optimal level of ε. On the contrary, in 39 countries
(33% of the sample), a limited emigration rate increases ε [i.e., Γ(0) − 1 is positive].
In this latter group, Γ(p) − 1 is positive for 11 countries, implying that p < p̃:
sending one more migrant abroad still increases the optimal level of ε; in the
remaining 28 countries, Γ(p) − 1 is negative, implying that p > p̃: at the margin,
sending an additional migrant abroad reduces ε.
Figure 1(b) illustrates the concave relationship between Γ(0) − 1 and the migration
premium, w*(1 − σ)ϕ/w.16 From equation (21), the elasticity of Γ(0) − 1 to the
migration premium is equal to 1 − θ. Under our benchmark calibration scenario,
when the income ratio is below 6.0, Γ(0) − 1 is negative and any level of brain drain
decreases ε. Γ(0) − 1 is positive when the migration premium is larger than 6.0. This
situation arises in 39 countries. As for Figure 1(c), it illustrates the relationship
between Γ(p) − 1 and the emigration rate, p. It shows that Γ(p) − 1 tends to decrease
with p, implying that emigration reduces the optimal level of public education
spending when p is large. Heterogeneity across countries is due to the fact that Γ(p)
− 1 also depends on the international earning differential. In Table A.1 in Appendix
(columns 3 and 4), we regress Γ(p) on the set of country-specific determinants [x,
w* (1 − σ)ϕ/w, p]. In line with equation (21), we find that Γ(p) is positively
influenced by the skill premium (capturing the migration-induced changes in
students’ efforts to accumulate human capital), and negatively influenced by the
emigration rate (capturing the loss of human capital due to migration).17 Hence, the
condition Γ(p) − 1 > 0 is satisfied when w*(1 − σ)ϕ/w is sufficiently large and when
the brain drain is relatively low. In our benchmark setting, this situation arises in
only 11 countries (i.e., Afghanistan, Bangladesh, Burkina Faso, Central African
Republic, Chad, Guinea, Guinea-Bissau, Kyrgyzstan, Mongolia, Niger, and
Tajikistan). Third, instead of focusing on marginal changes in p, Figure 1(d)
compares the optimal level of public spending at the current level of emigration, ε
(p), with that of the closed economy, ε(0). We identify 21 countries above the 45
degree line where the current levels of brain drain call for higher levels of public
education. In these countries, the difference ε(p) − ε(0) is rather small. The 99
16
In Table A.1 in Appendix (columns 1 and 2), we regress Γ(0) on the set of country-specific
determinants. In line with equation (21), w*(1 − σ)ϕ/w is the only significant determinant of Γ(0).
17
As a linear approximation, Table A.1 (column 3) suggests that Γ(p) − 1 > 0 when 0.322 + 0.077
(w*(1 − σ)ϕ/w) − 0.790p > 1, or equivalently when p < 0.097(w*(1 − σ)ϕ/w) − 0.858.

Figure 1. Brain drain and optimal public education spending.

countries below the 45 degree line are those where current emigration entails lower
levels of public spending on education. The difference is large in some countries.
These results seem to contradict the empirical findings of Docquier et al. (2008),
where a negative relationship is found between the levels of public expenditures on
tertiary education per student and skilled emigration rates. Nevertheless, our
simulations reveal that the optimal ratio ε/H at the current level of p is always
smaller than in the closed economy. Hence, our results suggest that emigration
increases the optimal amount of public spending on education in many developing
countries, but increases it less than in proportion to the amount of time spent by
students in education [as in line Docquier et al. (2008)].

3.2.3 Robustness checks

Finally, we proceed to a sensitivity analysis. Table 1 documents the sensitivity of our results
to the three structural parameters, θ, β, and γ. It reports the mean elasticity of human
capital to emigration in column 1. Columns 2 and 3 provide the number and
percentage of countries where Γ(0) − 1 and Γ(p) − 1 are positive, respectively. In
columns 4 and 5, we report the number and percentage of countries where public
education spending and after-migration human capital stocks increase compared to the
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Journal of Demographic Economics 287

no-migration, counterfactual equilibrium. Finally, columns 6 and 7 provide similar results

when considering an alternative counterfactual which consists of equalizing p to the
observed emigration rate of low-skilled workers (denoted by pmin). This counterfactual
is the one used in Beine et al. (2008) to identify the cases of net brain gain.
Under the benchmark calibration scenario, we match the elasticity of human capital
to emigration; we identify 20 countries (respectively, 21 countries) where emigration
increases the stock of human capital compared to the closed economy counterfactual
(respectively, compared to the pmin scenario). These results are very much in line
with those of Beine et al. (2008). The first robustness check reveals that an increase
(respectively a decrease) in θ reduces (respectively increases) the number of countries
where the optimal level of ε and the after-migration stock of human capital is
positively affected by the brain drain. On the contrary, the middle part of the table
shows that a change in β has no effect on public education responses to emigration
and on the number of brain gain cases. Finally, the bottom part of the table shows
that an increase (respectively a decrease) in γ increases (respectively decreases) the
number of countries where the optimal level of ε and the after-migration stock of
human capital is positively affected by the brain drain. Compared to the estimated
level of d ln H/d ln p (comprised between 0.05 and 0.20), changes in θ or in β
induce moderate deviations in the elasticity of human capital formation to
emigration (see column 1). This is a nice property of our model although it also
means that there is a big deal of uncertainty surrounding the number of countries
where skilled emigration increases the optimal investment in public education.
Qualitatively, however, cases with dε/dp > 0 are obtained under all parameter sets. In
addition, the results in Table 1 indicate that the number of brain gain cases [i.e.,
countries such that h(p) > h(0) or h(p) > h(pmin), respectively] is exactly identical to
the number of countries where emigration increases the optimal provision of public
education [i.e., ε(p) > ε(0) or ε(p) > ε(pmin), respectively]. Hence, the conditions for
ε(p) > ε(0) are equivalent to those under which an increase in emigration induces a
net brain gain. In line with Beine et al. (2008), a positive response in public
education is called when the international earning differential with destination
countries is large, and when the emigration rate is relatively low.

4. Extension with endogenous quotas

Our analysis to this point is based on the assumption that the probability that a skilled
worker is able to migrate is exogenously given. We now extend our model to endogenize
both the education policy of the source country and the immigration policy of the host
country. The optimal immigration policy of the host country is described in section 1.
Section 2 characterizes the Nash equilibrium where both countries simultaneously
choose their optimal policies in a non-cooperative manner. A comparative statics
analysis is subsequently provided in section 3.

4.1 Endogenizing the optimal immigration quota

Let us begin with the hypothesis that the admission of immigrants in the host country is
for the purpose of enabling the employers to benefit from the opportunity to hire
foreign labor. Expansion of immigration programs for the admission of skilled
migrants is typically driven by employer lobbies, as recently documented by Facchini
et al. (2015). In examining the data on lobbying expenditures of organizations trying
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288
Slobodan Djajić et al.
Table 1. Sensitivity analysis

d ln H 1(p) h(p) 1(p) h(p)

(θ, β, γ) Γ(0)>1 Γ(p)>1 >1 >1 >1 >1
d ln p 1(0) h(0) 1(pmin ) h(pmin )

Benchmark
(0.70, 0.15, 1.0) 0.080 39 (33%) 11 (9%) 20 (17%) 20 (17%) 21 (18%) 21 (18%)
Sens. to θ
(0.65, 0.15, 1.0) 0.109 57 (42%) 26 (22%) 39 (33%) 39 (33%) 41 (34%) 41 (34%)
(0.75, 0.15, 1.0) 0.059 13 (11%) 2 (2%) 6 (5%) 6 (5%) 5 (4%) 5 (4%)
Sens. to β
(0.70, 0.05, 1.0) 0.071 39 (33%) 11 (9%) 20 (17%) 20 (17%) 21 (18%) 21 (18%)
(0.70, 0.30, 1.0) 0.104 39 (33%) 11 (9%) 20 (17%) 20 (17%) 21 (18%) 21 (18%)
Sens. to γ
(0.70, 0.15, 0.9) 0.068 26 (22%) 5 (4%) 11 (9%) 11 (9%) 12 (10%) 12 (10%)
(0.70, 0.15, 1.1) 0.095 45 (33%) 20 (9%) 29 (17%) 29 (17%) 34 (18%) 34 (18%)
Journal of Demographic Economics 289

to influence immigration policy in the United States over the period 1998–2005, they
find that Microsoft was the single largest spender ($3,564,231) followed by Motorola
($2,660,473). Noting that the national cap on H-1B visas was 115,000 in the year
2000 and then raised to 195,000 in the years 2001–2003, it would be difficult to
argue that these firms have not benefitted from the increase in the quota.18
To capture the notion that the inflow of migrants is expected to generate rents for
their employers, we assume that the objective of F is to choose M that maximizes

V ∗ = w∗ sfMH (1, z(

w, 1, p, w∗ , s, f)) − Q(M), (22)

where the first term on the right represents total employers’ rents generated by F’s
immigration policy and Q(M) is the perceived cost for the society, including the
costs imposed on skilled native workers, of hosting M immigrants. In most of the
host countries, the attitude of the native population (in contrast with that of
employers) is negative when asked if more immigration is preferable. Facchini and
Mayda (2008) find that in over 20 high- and middle-income economies, less than
10% of respondents who gave an opinion about migration were in favor of
increasing the number of immigrants to their country. Moreover, regions with a
higher percentage of immigrants tend to have a higher probability of natives
expressing negative attitudes on immigration.19 Although in Western countries
these negative attitudes pertain primarily to unskilled migrants, asylum seekers, and
undocumented foreign workers, there is also resistance to skilled migration in
countries where university graduates feel that they are unable to find their first job
because they are obliged to compete with foreign skilled workers or, as in the
United States, where native skilled workers have been laid off while their employer
is adding hundreds of new H-1B workers to the payroll [see Hira (2010), p. 9]. In
some countries, there is resistance to skilled migration even in the presence of a
severe shortage in some occupations. One example is Japan, which has bilateral
migration agreements with the Philippines, Indonesia, and Vietnam, allowing for
immigration of nurses under country-specific quotas. There is considerable
resistance throughout their health services sector to the employment of foreign
nurses as patients have a very strong preference to be treated by Japanese nurses
[Kobayashi (2014)].

18
A recent paper by Doran et al. (2016) estimates the causal impact of extra H-1B visas on the receiving
firm, using randomized variation from the Fiscal Year 2006 and Fiscal Year 2007 H-1B lotteries. They find
evidence that “…H-1B workers at least partially crowd out other workers, with the estimates typically
indicating substantial crowd out of other workers” (p. 32). They also note: “Consistent with firm profit
maximization, we find some evidence that extra H-1B visas increase median firm profits. We also find
some evidence that extra H-1B visas lead to a decrease in median earnings per employee… Overall, our
results are more supportive of the narrative about the effects of H-1Bs on firms in which H-1Bs crowd
out alternative workers, are paid less than the alternative workers whom they crowd out, and thus
increase the firm’s profits despite no measurable effect on innovation” (pp. 32–33).
19
See, for example, Schlueter and Wagner (2008) and Markaki and Longhi (2012). Ortega and Polevieja
(2012) is of related interest. There is a growing literature on the political economy of immigration policy,
starting with the pioneering work of Benhabib (1996) and extensions within a dynamic framework, such as
Ortega (2005) and Facchini and Testa (2015).

In what follows, we shall assume that Q ′ (M) > 0 and Q ′′ (M) > 0. Maximization of V*
with respect to M requires that

∂V ∗
; VM ∗ = R(1 + ghzM ) − Q′ (M) = 0, (23)
∂M

where R = w∗ sfH (1, z( w, 1, M/N, w∗ , s, f)) is the per-worker rent enjoyed by the
employers of skilled immigrants, γ is the elasticity of H(.,.) with respect to z [see
equation (5)] and ηzM is the elasticity of z with respect to M:

D
hzM ; > 0. (24)
1 − g(1 − u)

An expansion of the immigration quota stimulates students’ effort in S by increasing

the probability of being able to migrate. The optimal immigration policy implied by
equation (23) therefore requires the admission of skilled workers beyond the point
where the rent, R, generated per migrant is equal to the marginal cost, Q ′ (M), of
admitting an extra worker. This is because a more generous admission policy implies
a higher level of skill in possession of each immigrant and hence larger rents enjoyed
by F’s employers on the entire stock of foreign labor employed in the economy. In
terms of the parameters of the model, a lower degree of concavity of the utility
function (θ), a higher elasticity of H(.,.) with respect to a student’s effort in school
(γ), and, recalling the definition of Δ, a larger international wage differential, all
work in the same direction to provide F with a stronger incentive to admit
immigrants beyond the point where R = Q ′ (M).
If the degree of convexity of Q(M) is sufficiently high, which we assume to be the
case,20 the second-order condition for the maximization of V* is satisfied.

∂VM ∗ Rg D
; VMM ∗ = [1 + ghzM + (1 − D)] − Q′′ (M) < 0. (25)
∂M [1 − g(1 − u)]M

Also note that

∂VM ∗ Rb
; VM1 ∗ = (1 + ghzM ) > 0, (26)
∂1 1[1 − g(1 − u)]

which states that the higher the provision of educational services in S, the stronger the
incentive for F to admit more immigrants. This completes the presentation of our
model’s structure.
20
The degree of convexity of the Q(M) function must be such that Q ′′ (M)M/Q ′ (M) > [1 + (1 − Δ)/(1 +
γηzM)][γΔ/[1 − γ(1 − θ)]]. If we consider, for example, the case in which γ = 0.8, θ = 0.6, M/N = 0.05, and
the international earnings differential, w∗ (1 − s)f/w = 4, with w normalized to unity, a value of Q ′′ (M)
M/Q ′ (M) > 0.079 is required to satisfy the second-order condition. It can be shown that this critical value is
decreasing in θ and increasing in γ, M/N, and the international earnings differential.

4.2 Nash equilibrium

We consider the case of both countries simultaneously choosing their policies in a
non-cooperative manner so as to maximize their individual welfare. For the source
country, the optimal provision of education (ε) is implicitly given by equation (15),
which is its reaction function, Vε = 0, while the host country sets its optimal
∗
immigration quota (M) on the basis of its own reaction function, VM = 0, as given
by equation (23). The slope of Vε = 0 is

d1 V1M 1[1 − g(1 − u)](G − 1)
=− = _0. (27)
dM V1 =0 V11 (N − M)[1 − b − g(1 − u)]

Noting that β + γ(1 − θ) < 1 in the denominator, the slope of Vε is positive for
parameter values corresponding to an LM equilibrium (i.e., Γ>1) and negative in an
HM equilibrium (i.e., Γ<1).
The slope of F’s reaction function is unambiguously positive.

d1 VMM ∗
=− > 0, (28)
dM VM ∗ =0 VM1 ∗

∗ ∗
as VMM < 0 and VM1 > 0. Note that 1 − Δ is a positive fraction representing the ratio of
the period-two utility of working at home for the real wage w , to the expected
period-two utility when the probability of migration is M/N.

4.3 Comparative statics

Let us examine the implications of changes in the key exogenous variables on the
Nash-equilibrium values of the policy instruments of the two countries. By totally
differentiating the reaction functions (15) and (23), we obtain
V11 V1M d1 −V1x −V1f
= dx + df
VM1 ∗ VMM ∗ dM 0 −VMf ∗
0
+ dQ′ (M), (29)
−VMQ′ (M) ∗

Where V1x = −N, V1f = (N − M) wbgH[D +(M/N)(1 − D)]/1f[1 − g(1 − u)]2 > 0,
∗
VMf = R{g(1− u) (1 − D) D+ (M/N)(1 − D) + 1 + ghzM ∗[1 − g(1− u) + g(1 − u)
[(1 − D) D + (M/N)(1 − D) ]]}/f[1 − g(1 − u)] > 0, and VMQ ′
(M) = −1.
The system (29) enables us to solve the impact of changes in the exogenous variables,
including x, ϕ, and the perceived marginal cost of admitting immigrants into F, Q ′ (M),
on the equilibrium values of M and ε. Stability of the Nash equilibrium requires that the
∗ ∗
determinant V = V11 VMM − VM1 V1M > 0. This implies that in an LM equilibrium,
∗
depicted in Figure 2(b), the positively sloped VM = 0 schedule must be steeper than
the Vε = 0 schedule. In an HM equilibrium, depicted in Figure 2(a), the Vε = 0
schedule is negatively sloped.
In this context, some of the key comparative statics results may be summarized in
the following proposition:

Proposition 2 Accounting for the interaction between the optimal immigration policy of
a host country and education policy of a source country:

Figure 2. Comparative statics—change in x.

Notes. (a) This figure shows the case where VεM < 0 and the slope of the reaction function for S is negative. (b) This
figure shows the case where VεM > 0 and the slope of the reaction function for S is positive. In both cases (i) a
decrease in the cost of education moves the Nash equilibrium from point a to point b and (ii) a decrease in the
perceived marginal cost of hosting immigrants moves the Nash equilibrium from point a to point c.

(i) A decline in the cost of education in S increases the Nash-equilibrium levels of both
educational spending in S and the immigration quota in F.
(ii) A decrease in the marginal cost of hosting immigrants in F increases the
Nash-equilibrium level of the immigration quota and increases (decreases) educational
spending in a low- (high-) migration equilibrium.
(iii) In a high-migration equilibrium, an increase in the international transferability of
skills from S to F raises the Nash-equilibrium level of the immigration quota and has
an ambiguous effect on educational spending.
(iv) In a low-migration equilibrium, an increase in the transferability of skills from S to
F has a positive effect on the level of spending on education as well as on the immigration
quota.
The proofs and analytical developments are provided in the following subsections.

4.3.1 Change in the cost of providing education

Let us suppose that improvements in communications and information technologies
lower the cost of transmitting information through the educational system, giving
both teachers and students more efficient and lower-cost access to knowledge and
educational tools. In the context of our model, we can think of such new
technologies as being instrumental in lowering the cost, x, that the authorities face in
providing a unit of educational services to students in S.
Using the system of equation (29), the effects of a change in x on the
Nash-equilibrium values of ε and M are as follows.

d1
V = −VMM ∗ V1x = NVMM ∗ < 0, (30)
dx

dM
V = VM1 ∗ V1x = −NVM1 ∗ < 0. (31)
dx

The best response of S to a decline in the cost of education is to provide more ε to its
students. With the now higher level of education in S and a correspondingly greater
effort on the part of students to acquire skills, the best response of F is to admit
more immigrants. In Figures 2(a) and 2(b), a reduction in x gives rise to an upward
shift of the reaction function of S from (Vε = 0) to (Vε = 0)′ , while leaving the
∗
VM = 0 schedule unaffected. The Nash equilibrium therefore moves from point a to
point b. In both panels, this entails an increase in the equilibrium levels of ε and M,
but more so in an LM equilibrium of Figure 2(b), as the vertical shift of the Vε = 0
schedule is of the same magnitude in both panels (i.e., Vεx = −N).
A reduction in the cost of providing education can therefore be expected to have a
positive impact on the provision of educational services in S and on the level of skills
possessed by its graduates. This effect is reinforced by the endogenous
immigration-policy response of F in an LM equilibrium of Figure 2(b) and mitigated
in an HM equilibrium of Figure 2(a). Since the conditions in the relatively poorer
developing countries, with low wages, are more likely to meet the criteria for a
“low-migration” equilibrium (when compared with the conditions in the relatively
more prosperous developing economies, other things being equal), our model
suggests that technological improvements that lower the cost of providing educational
services are likely to have a greater positive impact on human capital formation in
such economies. This follows from the model’s implication that for a country in an
LM equilibrium, the interaction between education and immigration policies of S
and F helps to stimulate educational spending and study the effort of students, while
for one in an HM equilibrium, this interaction has a negative impact that offsets to
some extent the positive direct effects on ε and z.

4.3.2 Drop in the marginal cost of hosting immigrants

Suppose that the population of F undergoes an exogenous shift in its attitude toward
immigration. To be more concrete, let us assume that the perceived cost of hosting
immigrants is given by Q(M) = q0 + q1M 2, where q0 and q1 are positive, exogenously
given parameters and Q ′ (M) = 2q1M. A change in the perceived marginal cost of
hosting immigrants in that case corresponds to a change in q1.
On the basis of equation (29), we can solve for the effects of a change in Q ′ (M) on ε
∗
and M. Noting that VMQ ′
(M) = −1, we have

d1
V = −V1M _ 0, as G + 1, (32)
dQ′ (M)

dM
V = V11 < 0. (33)
dQ′ (M)

Equation (33) shows that when the perceived marginal cost of hosting immigrants
decreases, the Nash-equilibrium level of F’s immigration quota increases. The effect
on the provision of educational services in S is ambiguous, however, as indicated in
equation (32). In an HM scenario, with a negatively sloped Vε = 0 schedule, the
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294 Slobodan Djajić et al.

source country’s best response to an expansion of the immigration quota in F is to lower

ε. This can be seen in Figure 2(a), where starting from an initial HM equilibrium at
point a, a reduction in Q ′ (M) shifts the (VM
∗
= 0) schedule to the right so that the
∗ ′
new (VM = 0) schedule intersects the unaffected Vε = 0 locus at point c. This results
in a higher Nash-equilibrium value of M and a lower ε. Alternatively, in an LM
equilibrium, an increase in M raises the level of education provided in S. This is
illustrated in Figure 2(b), where the Nash equilibrium moves from point a to c in
∗
response to a rightward shift of the VM = 0 locus.

4.3.3 Change in ϕ
Improvements in information and communications technologies are also contributing
to the globalization of the education industry. What students and trainees are learning
across countries in any given field of study or occupation is becoming increasingly more
similar. This is also driven to a significant extent by the expansion of trade in goods and
services and the spread of technological knowledge across the globe. In terms of our
model, this phenomenon can be captured by an exogenous increase in ϕ, which
measures the degree to which skills possessed by a migrant are transferable from S to
F. Using the system of equation (29), we find that the effects on the
Nash-equilibrium values of ε and M are as follows:

d1
V = VMf ∗ V1M − VMM ∗ V1f _ 0, (34)
df

dM
V = V1f VM1 ∗ − VMf ∗ V11 > 0, (35)
df
∗ ∗ ∗
where we recall that VM f > 0, Vεϕ > 0, VM1 > 0, VMM < 0, Vεε < 0, and the sign of VεM
is the same as that of Γ − 1. The effect of an increase in ϕ on the Nash-equilibrium level
of spending on education is ambiguous and depends on the slope of the reaction
function of S. Figure 3(a) illustrates the case of an HM equilibrium with a negatively
sloped Vε = 0 locus. An increase in ϕ shifts the Vε = 0 schedule up and to the right
∗
and the VM = 0 schedule down and to the right. In relation to the original
equilibrium at point a, we find that the immigration quota of F is unambiguously
higher. Depending on the relative magnitudes of the two shifts, however, the
new equilibrium can feature either a higher or a lower ε. The rightward shift of
∗
the VM = 0 schedule is greater than that of the Vε = 0 locus if
∗ ∗ ′′
−VM f /V MM > −V1f /V1M . The Nash equilibrium then moves to d , where the level
of ε is lower. This would be the case, for instance, if the size of the immigration
quota of F is highly sensitive to the amount of (marketable) human capital in
∗
possession of potential immigrants, which makes VM f relatively large. Alternatively,
if the sensitivity of F’s quota to the stock of human capital that immigrants bring
∗
into the economy is sufficiently low, the rightward shift of the VM = 0 schedule is
′
smaller than that of Vε = 0. The new equilibrium is then at d , where it is optimal for
S to raise ε in response to an increase in ϕ triggered by the globalization of the
education industry.
The implications of an increase in ϕ in an LM equilibrium are illustrated in Figure 3
(b) by a shift of the Nash equilibrium from point a to d. More spending on education is
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Journal of Demographic Economics 295

Figure 3. Comparative statics—change in ϕ.

Notes. (a) This figure shows the case where VεM < 0 and the slope of the reaction function for S is negative. An
increase in ϕ moves the Nash equilibrium from point a to points such as d ′ or d ′ ′ , depending on the relative
magnitudes of the rightward shifts of the V*M = 0 and the Vε = 0 schedules. (b) This figure shows the case where
VεM > 0 and the slope of the reaction function for S is positive. An increase in ϕ moves the Nash equilibrium from
point a to point d.

then optimal for S and more immigration is optimal for F. A higher ε and a higher M,
as well as the increase in ϕ that triggered the changes in policies, all serve to provide
students in S with stronger incentives to study, contributing to a more skilled and
more productive labor force both at home and abroad.

5. Conclusions
Instead of repeating the principal findings of this study, which are conveniently
summarized in the form of Propositions 1 and 2, we conclude the paper by
discussing its main contributions at a more general level. There are two key elements
and both of them flow directly from the model’s structure. The first relates to the
way we model skill formation. Instead of having to purchase human capital, as is
typically assumed in the earlier contributions to the literature on education policies
and the brain drain, we assume that students in the source country have free access
to public education, while the authorities choose the optimal provision of training.
Students then maximize their utility from consumption and leisure by choosing the
optimal amount of effort they apply in the process of human-capital accumulation.
Within this framework, the concavity of the utility function (θ) plays an important
role in terms of how students respond to educational and occupational opportunities
at home and abroad. Expansion of migration opportunities increases the
source-country’s gross stock of human capital in the empirically relevant case of θ<1.
Whether or not it increases the net stock, depends on the magnitude of θ, as well as
that of the elasticity, γ, of the human capital production function with respect to a
student’s effort, the international wage differential, and the emigration rate, M/N, in
the initial equilibrium. Our model implies that there is a net brain gain in a
“low-migration” equilibrium, characterized by a large γ, a low θ, a low M/N, and a
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296 Slobodan Djajić et al.

sufficiently large gap between earnings of a skilled worker at home and abroad. Previous
contributions to the brain-drain literature assume that the utility function is either
linear or logarithmic, which precludes an analysis of the role of θ in the process of
human capital accumulation. Our model is also the first in this literature to focus on
the effort of students in the system of higher education and hence the role of γ in
the transformation of that effort into human capital.
Calibrating the model on the basis of data pertaining to 120 developing countries
around the year 2010, we proceed to identify cases where it would be optimal to raise
public spending on higher education in response to an increase in the emigration rate
of skilled workers. Of the 120 countries in our sample, we find 81 cases where an
increase in emigration always reduces the optimal public expenditure on education. In
the 39 remaining countries, limited emigration of skilled workers (starting from the
zero emigration rate) calls for an increase in public spending on education. In 11 of
these economies, even an increase in emigration from the current rate calls for an
increase in public spending on education, while in the other 28 countries it calls for a
decrease. By contrast, former studies suggest that governments should respond to an
increase in skilled emigration by reducing per-capita spending on public education.
Our analysis shows that this may not always be the optimal response.
Finally, we examine the interaction between the host country’s immigration policy
and the source country’s education policy when both are endogenous and where
students optimally choose how much effort to apply in the process of human capital
accumulation. While we are aware that the two-country structure has its limitations
in the present context, it enables us to investigate the impact of exogenous shocks,
such as a technological improvement that lowers the cost of providing educational
services in the source country, a shift in preferences on immigration in the host
country, and a change in the degree of international transferability of human capital,
on the amount of effort expended by students in school, the optimal level of
source-country spending on education, and the optimal immigration quota of the
host country. With a growing number of bilateral migration agreements covering
skilled workers, particularly in the health services sector [e.g., bilateral Economic
Partnership Agreements (EPA) between Japan and Indonesia (2008), Japan and the
Philippines (2008), Japan and Vietnam (2009), or Venezuela and Cuba], a
two-country model of migration of skilled workers becomes increasingly relevant.

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Appendix
A. Determinants of G(0) and G(p)
To help interpret our results, we propose a linear approximation of our model. In Table A1, we regress Γ(0)
and Γ(p) on the set of country-specific characteristics (x, w*(1 − σ)ϕ/w, p). We use standard OLS
regressions with Γ(.) taken in level or in log. The model in level gives a better fit. In columns 1 and 2,
we regress Γ(0) on the set of country-specific determinants. In line with equation (21), w*(1 − σ)ϕ/w is
the only significant determinant of Γ(0). In columns 3 and 4, we regress Γ(p) on the same
determinants. The linear model suggests that Γ(p) − 1 > 0 when 0.322 + 0.077 (w*(1 − σ)ϕ/w) − 0.790p > 1,
or equivalently when p < 0.097 (w*(1 − σ)ϕ/w) − 0.858.

Table A.1. OLS regression results

Γ(0) log Γ(0) Γ(p) log Γ(p)

x 0.005 0.069 0.043 0.059

(0.033) (0.096) (0.040) (0.082)
w∗ (1 − s)f 0.123* 0.155* 0.077* 0.126*
w
(0.003) (0.008) (0.004) (0.007)
p 0.012 0.139 − 0.790* − 1.418*
(0.057) (0.163) (0.068) (0.139)
Const. 0.165* − 1.234* 0.322* − 1.088*
(0.030) (0.086) (0.036) (0.073)
R2 0.941 0.750 0.856 0.798
F 621.5 116.2 229.1 152.8
Nb. obs. 120 120 120 120
Robust standard errors between parentheses. * Significant at the 1% threshold.

B. Country-specific results
Table A2 provides country-specific calibration and simulation results obtained under the benchmark
scenario. The first 11 rows list countries where both Γ(0)>1 and Γ(p)>1. The next 28 rows include
countries where Γ(0)>1 and Γ(p)<1. The last 81 rows include countries where emigration always
reduces the optimal provision of public education.

Table A2. (Continued.)

w∗ (1 − s)f
Country p x ( × 100) Γ(0) Γ(p) Γ(0) > 1 Γ(p) > 1
w
Tanzania 0.32 9.01 0.03 1.33 0.70 1 0
Togo 0.23 12.27 0.09 1.60 0.97 1 0
Uganda 0.19 6.54 0.16 1.08 0.77 1 0
Zambia 0.35 7.88 0.23 1.23 0.61 1 0
Zimbabwe 0.65 9.22 0.04 1.35 0.30 1 0
Albania 0.49 3.47 0.31 0.65 0.27 0 0
Algeria 0.19 3.66 0.33 0.68 0.50 0 0
Angola 0.27 4.61 0.13 0.83 0.53 0 0
Argentina 0.23 1.60 0.14 0.22 0.16 0 0
Armenia 0.17 1.51 0.93 0.19 0.15 0 0
Azerbaijan 0.05 2.09 0.98 0.35 0.33 0 0
Belize 0.71 2.60 0.12 0.47 0.11 0 0
Benin 0.13 5.38 0.10 0.94 0.75 0 0
Bhutan 0.02 3.08 0.52 0.57 0.55 0 0
Botswana 0.10 1.82 0.06 0.28 0.25 0 0
Brazil 0.03 1.49 0.31 0.18 0.17 0 0
Bulgaria 0.16 3.49 0.86 0.65 0.51 0 0
Cambodia 0.35 3.56 0.18 0.66 0.37 0 0
Cape Verde 0.60 3.90 0.12 0.72 0.22 0 0
China 0.06 4.42 0.28 0.80 0.73 0 0
Colombia 0.07 2.23 0.84 0.39 0.35 0 0
Congo, Rep 0.41 3.31 0.04 0.62 0.31 0 0
Costa Rica 0.06 2.50 0.60 0.45 0.42 0 0
Croatia 0.14 1.82 0.61 0.28 0.24 0 0
Cuba 0.32 4.46 0.14 0.81 0.47 0 0
Dominican Rep 0.54 4.04 0.28 0.74 0.27 0 0
East Timor 0.14 1.00 0.10 0.00 0.00 0 0
Ecuador 0.20 4.18 0.32 0.77 0.55 0 0
Egypt 0.07 3.76 0.38 0.70 0.62 0 0
El Salvador 0.46 4.41 0.28 0.80 0.34 0 0
Equatorial Guinea 0.41 1.28 0.22 0.11 0.06 0 0
Fiji 0.56 4.53 0.39 0.82 0.27 0 0
Gabon 0.13 3.25 0.57 0.61 0.50 0 0
Georgia 0.14 3.54 0.93 0.66 0.53 0 0
(Continued )

Table A2. (Continued.)

w∗ (1 − s)f
Country p x ( × 100) Γ(0) Γ(p) Γ(0) > 1 Γ(p) > 1
w
Guatemala 0.31 1.50 0.21 0.18 0.12 0 0
Guyana 0.80 3.29 0.08 0.61 0.09 0 0
India 0.05 3.82 0.36 0.71 0.65 0 0
Indonesia 0.02 2.54 0.34 0.46 0.45 0 0
Iran 0.06 2.37 0.89 0.42 0.39 0 0
Jamaica 0.66 3.26 0.29 0.61 0.16 0 0
Jordan 0.20 2.72 0.24 0.50 0.37 0 0
Kazakhstan 0.09 1.79 1.15 0.27 0.24 0 0
Kiribati 0.15 2.68 0.17 0.49 0.40 0 0
Laos 0.37 5.50 0.38 0.95 0.48 0 0
Lebanon 0.36 3.61 1.15 0.67 0.37 0 0
Lesotho 0.08 3.93 0.02 0.73 0.64 0 0
Libya 0.07 5.36 1.06 0.94 0.83 0 0
Macedonia 0.20 4.50 0.49 0.81 0.59 0 0
Malaysia 0.15 1.27 0.24 0.11 0.09 0 0
Maldives 0.14 1.73 0.06 0.25 0.21 0 0
Mali 0.15 5.81 0.08 0.99 0.77 0 0
Marshall Islands 0.30 2.44 0.16 0.44 0.28 0 0
Mauritius 0.70 1.00 0.15 0.00 0.00 0 0
Mexico 0.09 1.55 0.54 0.20 0.18 0 0
Micronesia 0.42 2.66 0.28 0.49 0.24 0 0
Morocco 0.27 3.45 0.25 0.64 0.42 0 0
Mozambique 0.41 3.06 0.02 0.57 0.29 0 0
Namibia 0.22 1.72 0.04 0.25 0.19 0 0
Palau 0.53 2.99 0.23 0.56 0.22 0 0
Panama 0.14 2.60 1.05 0.47 0.39 0 0
Paraguay 0.07 4.52 0.31 0.82 0.73 0 0
Peru 0.09 3.67 1.19 0.68 0.59 0 0
Philippines 0.33 4.58 0.56 0.83 0.46 0 0
Romania 0.29 3.06 0.49 0.57 0.37 0 0
Russia 0.03 3.78 1.38 0.70 0.67 0 0
St Lucia 0.49 1.79 0.41 0.27 0.13 0 0
St Vincent-Gren 0.68 2.50 0.30 0.45 0.12 0 0
Samoa 0.53 3.00 0.34 0.56 0.22 0 0
(Continued )

Table A2. (Continued.)

w∗ (1 − s)f
Country p x ( × 100) Γ(0) Γ(p) Γ(0) > 1 Γ(p) > 1
w
Sao Tome Principe 0.66 4.95 0.04 0.88 0.21 0 0
Senegal 0.33 4.97 0.07 0.88 0.49 0 0
Serbia Montenegro 0.08 4.23 0.51 0.77 0.68 0 0
Solomon Islands 0.04 4.59 0.21 0.83 0.77 0 0
South Africa 0.18 2.04 0.19 0.34 0.27 0 0
Sri Lanka 0.14 2.46 1.14 0.44 0.37 0 0
Sudan 0.12 4.86 0.18 0.87 0.71 0 0
Swaziland 0.27 2.83 0.03 0.52 0.35 0 0
Syria 0.14 1.57 0.18 0.21 0.17 0 0
Thailand 0.03 1.99 0.53 0.33 0.31 0 0
Tonga 0.78 2.03 0.16 0.34 0.06 0 0
Tunisia 0.17 2.21 0.28 0.38 0.30 0 0
Turkey 0.07 1.69 0.37 0.24 0.22 0 0
Turkmenistan 0.01 3.90 1.28 0.72 0.71 0 0
Vanuatu 0.08 3.83 0.36 0.71 0.63 0 0
Venezuela 0.24 1.61 0.13 0.22 0.16 0 0
Vietnam 0.22 3.72 0.15 0.69 0.49 0 0
Yemen 0.09 2.84 0.07 0.52 0.46 0 0

Cite this article: Djajić S, Docquier F, Michael MS (2019). Optimal education policy and human capital
accumulation in the context of brain drain. Journal of Demographic Economics 85, 271–303. https://
doi.org/10.1017/dem.2019.10

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Journal of Demographic Economics (2019), 85, 271–303

Optimal education policy and human capital

(Received 26 September 2018; revised 12 June 2019; accepted 13 June 2019)

Keywords: Education policy; immigration policy; migration of skilled workers

countries. Island economies, as well as countries in Central America, sub-Saharan

subsidize the optimally-chosen private expenditures on education. We assume instead

capital without having to rely on education subsidies. More precisely, emigration

2. Optimal education policy under autarky

C( H(z, 1),

max v(1 − z) + u(

and ε as given. The first-order condition reads:

and assume that

H(z, 1) = m1b z g , (5)

where μ > 0 is a parameter reflecting the efficiency of the skill-formation technology,

where w is the exogenously-given marginal productivity of a unit of efficiency labor and

Maximizing V a with respect to ε requires that

On the basis of equation (7), we have

Thus, maximization of V a with respect to ε implies that

3. Optimal policy with immigration quotas

max v (1 − z) + E [u(C)], (11)

where E [u(C)], the expected utility of consumption of a representative student in S at

V =w w, 1, M/N, w∗ , s, f)) − Nx1.

In comparing equation (15) with (10), we immediately notice that (N − M) < N,

and the second-order condition is satisfied as

[w∗ (1 − s)f]1−u 1−u

In what follows, we shall refer to Δ as a skilled worker’s “normalized” utility gain of

parameters of the model. An increase in ε is the optimal response if

Alternatively, if Γ(p) < 1, it is optimal for S to spend less on education following an

of acquiring a standard unit of human capital dependent on an agent’s innate ability.

3.2 Quantitative assessment

w, ∂z/∂w∗ < 0), or in

3.2.2 Benchmark results

Figure 1. Brain drain and optimal public education spending.

3.2.3 Robustness checks

no-migration, counterfactual equilibrium. Finally, columns 6 and 7 provide similar results

4. Extension with endogenous quotas

4.1 Endogenizing the optimal immigration quota

d ln H 1(p) h(p) 1(p) h(p)

V ∗ = w∗ sfMH (1, z(

An expansion of the immigration quota stimulates students’ effort in S by increasing

Also note that

4.2 Nash equilibrium

4.3 Comparative statics

Figure 2. Comparative statics—change in x.

4.3.1 Change in the cost of providing education

4.3.2 Drop in the marginal cost of hosting immigrants

source country’s best response to an expansion of the immigration quota in F is to lower

Figure 3. Comparative statics—change in ϕ.

Table A.1. OLS regression results

Γ(0) log Γ(0) Γ(p) log Γ(p)

x 0.005 0.069 0.043 0.059

Table A2. (Continued.)

Table A2. (Continued.)

Table A2. (Continued.)

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