DP4305 Smuggling Humans: A Theory of Debt-Financed Migration

Author(s): Guido Friebel, Sergei Guriev
Publication Date: March 2004
Keyword(s): financial contracting, illegal migration, indentured servitude, wealth constraints
JEL(s): J61, N21, O15, O17
Programme Areas: Labour Economics, Transition Economics, Institutions and Economic Performance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4305

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/labour 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 because of, for instance, 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.