Labor mobility, goods tradability, and efficient allocation of disaster risk

Given the role of agriculture sector in an economy and its vulnerability in terms of disasters, direct monetary transfers are paid from tax-payers to agriculture producers in many countries. Government policies are expected not only to provide higher and more stable income to producers but also to create incentives to attract rural households to continue farming. Nevertheless, these policies have been doubted for inducing economic inefficiency because the later piece of effect masks the market signal for resources and risk allocation. This research uses a dual-economy model with inter-sectoral flow of labor and commodity to justify government policies that discourages rural producers to work in urban sectors. The result of the model shows that when there is no disaster insurance market, migration behavior should be controlled and fiscal transfer do improve economic efficiency. When there is disaster insurance market in this economy, market mechanism can achieve social optimal allocation if goods tradability is perfect. When goods tradability is imperfect, migration behavior in the insurance equilibrium should be controlled if the migration costs is low, or vice versa. Government intervention is necessary to encourage or discourage migration in each case, respectively.