Cities are of utmost importance in the working of the market economy in the spatial context. Migration between cities not only determines the formation of cities but also works as a real-world mechanism of resource allocation.

This paper analyzes the migration of people and the allocation of population between cities. The paper proceeds from the classical labour market model of migration to more detailed models in order to reason the existence of cities and to show the need for centralized policy intervention in steering migration. Club theoretic analysis of migration between asymmetric cities shows that administrative and economic policy instruments differ in their effects on residential allocation and welfare. In particular, lump-sum tax/transfers pool the welfare-creating potentials of cities thus affecting the efficiency condition. Therefore, lump-sum tax/transfers are superior to Pigouvian taxes and quantity rationing, and they also activate rather than stabilize migration.