Urbanization and/or rural industrialization in China

We study urbanization and rural industrialization in a setting involving one urban region (UU) and one rural region (RR). Farmers are heterogeneous in their attitude toward migration, while firms' efficiency is higher in UU than in RR because agglomeration economies have been built in UU. Farmers face three options: (i) working in the agricultural sector, (ii) setting up firms in RR, or (iii) moving to UU. There exists a unique equilibrium, which displays four different patterns. In the first one, both urbanization and rural industrialization occur simultaneously. In the second and third patterns, either urbanization or rural industrialization arises, whereas the last pattern involves an industrial core and an agricultural periphery. The conditions under which each pattern emerges are determined. The transfer of labor from the agricultural to the industrial sector always increases farmers' welfare, while the welfare impact on incumbent urban workers is ambiguous.

► We study urbanization and rural industrialization in a setting involving one urban region (UU) and one rural region (RR).
► Farmers are heterogeneous in their attitude toward migration, while firms' efficiency is higher in UU than in RR.
► Farmers face three options: (i) working in the agricultural sector, (ii) setting up firms in RR, or (iii) moving to UU.
► We find there exists a unique equilibrium with four different patterns and determine the conditions.
► The welfare impact on farmers and incumbent workers are also carefully evaluated.