"This paper extends the work of Ethier on illegal immigration by examining the optimal level of enforcement for the labor-importing country in a two-country model and by considering the effects of allowing capital mobility. We derive a formula for the optimal level of enforcement against firms that hire illegal workers, and show that the presence of enforcement costs makes the policy less efficient than a wage tax. With capital mobility, foreign workers gain from an increase in enforcement in the home country because capital is driven out of the home country."
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