Economic growth in a mixed urban economy: Infrastructure investment and labor migration

The growth path of a mixed, open urban economy is considered, which is linked to the national economy through labor flows in the direction of higher per capita consumption. In the private sector, profit maximizing firms produce output, individually hiring labor but jointly using infrastructure with public good characteristics. The public sector chooses a taxation policy for dividing output into consumption and infrastructural investments to maximize the current value of future per capita felicity. Urban growth paths are derived, and public sector policies regarding the provision of infrastructure and the control of labor migration are analyzed.