WP-54-2012: The effect of networks and risk attitudes on the dynamics of migration
Two central concerns for policy makers are the manageability of the rate of migration and the qualities of incoming migrants. This paper addresses these issues by proposing a theory that links risk aversion, the size of expatriate networks, migrant characteristics and the timing of migration. As the size of networks increases over time, finding employment becomes less uncertain, inducing more risk-averse individuals to migrate. Given that recent research suggests a negative relationship between risk aversion, entrepreneurial potential and cognitive ability, the model predicts a decrease in the quality of these ‘unobservable’ characteristics as networks grow larger. In addition, the dynamic relationship between network size and uncertainty leads to the following hypotheses: when migrants are more reliant on networks for finding work, more individuals will migrate, they will migrate sooner and at a faster rate. I use German Socio-Economic Panel Study (SOEP) data to provide empirical support for the predictions of the theoretical model.