Search,migration, and social connections: Solving the migration puzzle to Beijing

We provide a plausible explanation for the phenomenon of migration to big cities such as Beijing and Shanghai. This process can be observed particularly among students who migrate to these cities and prefer to look for their first jobs upon completion of their studies, instead of going back to their hometowns. Despite the slightly higher wages offered in big cities, it is unclear why recently graduated students feel attracted to remain in big cities, where the living costs are much higher and the job market is more competitive compared to small cities. We develop a search and matching model in which we consider that the social connections created by the agents during their studies are used as a tool to get jobs. We solve for the optimal investment in social connections, and for the level of social capital that makes agents indifferent between migrating and staying in their current locations. We use a computational model and show that for agents with a sufficiently large social network, the value of social capital is large enough to overcome the value of going back to their hometowns, where they would face lower competition and living expenses, but they would lack the advantages that a social network represents.