Optimal Budget Institutions and Migration Externalities: The Role of Alternative Regional Criteria

I present a two-period, two-region model with interregional migration, allowing for the possibility of differing welfare criteria between the regions. I consider two alternative regional criteria: the »Native criterion« and the »Resident criterion.« The constrained welfare optimum is obtained by optimizing debt and transfer allocations to maximize the total welfare of the two regions. To attain the welfare optimum through decentralized borrowing and spending decisions, I identify the conditions under which the contributor to interregional redistribution must face a less stringent borrowing constraint than the recipient. These conditions necessitate that at least one region adopts the native criterion.