The Welfare Effects of Financing the Internal Enforcement of Illegal Immigration — No Discernment Case —

Abstract

The present chapter re-examines the Bond and Chen (1987) model of illegal immigration, subject to a government budget constraint (GBC) on the host country’s government. The host country’s government introduces an internal enforcement policy to catch illegal immigrants working in domestic firms, with the financing of this policy subject to the budget constraint. Furthermore, domestic firms cannot discern the difference between domestic labor and illegal foreign labor. We examine the effects of this finance-constrained policy on the welfare of the host country, the foreign country and the world, both in the absence and in the presence of capital mobility. Our main results can be compared to those of Chapter 5, in which we first introduced government financing constraints on the internal enforcement policy. We find that the inability of domestic firms to discern between domestic and (illegal) foreign workers does not alter the signs of the welfare effects of finance-constrained internal enforcement, but the magnitude of these effects do depend on the discernment ability of domestic firms.