Journal of Development Economics 9 (198 1) 357-373. North-Holland Publishing Company OPTIMUM TAXATION AND PBJBLIC PRODUCTION IN A DYNAMIC HARRIS-TODARO WORLD* Raghbendra JHA zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONML W illiams College, W illiamstown, MA 01267, U S,4 Ulrich L&ZHLER Unicersity of Maryland. College Park. MLa 20742, USA Received August 1980. f%al version received December 1980 This paper examines the steady-state dynamics and drvelops policy rakes in a Lwo cector optimum growth model with urban unemployment. People migrate from the rural sector to the urban sector in response to a difference between ihe minimum expected urban wage and tht- actual rural wage. Labor in the urban sector is heterogeneous and the skilled labor for:e owns the capital zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA s.“~;K in both sectors as well as the land in the rural sector. The government taxes: urban wages, capital income from both sectors. 2nd the income from !and, and invests In the two sectors. 1. Introduction The phenomenon of large scale rura!-urban migration in the face of substantial urban unemployment is a wIdespread one in most de~~elopin~ countries. Following the pioneering analysis of Harris and Todaro (1970) our understanding of this problem has been substantially deepened. Predictably, this development has led to an outpouring of research in this area. Most of this ensuing research has confined itself to formulating and estimating migration functions [see the recent excellent survey by Yap (1977)-j. While the importance of this research cannot be overemphasized. we tlave not seen re,,earch of any comparable magnitude UE the theoretical and policy implications of the initial insights of Harris and Todaro. These authors confined therqselves to a static analysis of !he problem and thus derived short-run rule :, for policy. We ha ve not seen a dynamic analysis of the issues involved and hence have little guidance for policy within an intertpmporal framework. The present paper is an attempt in thr* 4rection. *An earlier version of this paper was presented at the Ncrtheastecn Universities Development Consortium Conference at Harvard University in .4pril 1980. We would like to thank Brian Wright, John Sheahan, Janusz Ordover, M:chael Wattieworth and Gordon Winston for helpful comments. The advice of an anonymous referee is deeply appreciated. 0304-3878/81/oooc)-@~/$02.75 0 1981 North-Holland