published in: Journal of the European Economic Association, 2006, 4 (6), 1085-1111
We introduce financial constraints in a theoretical analysis of illegal immigration.
Intermediaries finance the migration costs of wealth-constrained migrants, who enter
temporary servitude contracts to pay back the debt. These debt/labor contracts are more
easily enforceable in the illegal than in the legal sector of the host country. Hence, when
moving from the illegal to the legal sector becomes more costly, for instance, because of
stricter deportation policies, fewer immigrants default on debt. This reduces the risks for
intermediaries, who are then more willing to finance illegal migration. Stricter deportation
policies may thus increase rather than decrease the ex ante flow of illegal migrants. We also
show that stricter deportation policies worsen the skill composition of immigrants. While
stricter border controls decrease overall immigration, they may also result in an increase of
debt-financed migration.
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