example of this development, which also has references to previous work in this tradition, is Basu, Chau, Fields and Kanbur (2016).

How about income distribution? With the basic setup, income distribution is determined by the migration equilibrium, which gives the share of population at each of the three income levels—rural, modern employment and unemployment/informal. Comparative statics on this income distribution has been a staple in the literature. For example, in an early contribution, Anand and Kanbur (1985) trace out the implications of increasing the urban modern wage or the number of urban modern jobs. More recently, papers such as those by Temple (2005) and Temple and Ying (2014) continue this tradition of tracing out the evolution of income distribution in a two-sector model of population reallocation between agriculture and nonagriculture under different economic environments.

There is thus a strong tradition of analyzing migration equilibrium and income distribution in the setting of two-sector Todaro/Harris-Todaro type models. However, the key is that these are two-sector models—typically a rural sector and an urban sector. The question of big cities versus small towns simply cannot be posed in such models because there is only a single urban sector encompassing the two. In order to answer the question posed at the start of this paper, on whether poverty reduction is best served by public investment in cities or in towns, we clearly need a model in which the urban sector is so disaggregated. The migration equilibrium will then have to encompass population allocation in three locations—one rural and two urban. And the national income distribution will now be more complex, taking into account income and respective population shares at each of the income levels in the three locations.

Multiple destinations are also a staple of the rural-urban migration literature. For example, Fafchamps and Shilpi (2013) is only one of the recent additions to the literature, looking at the choice of migration destination in Nepal using two rounds of the Living Standards Survey. But, like that paper, nearly all of this strand of the literature is empirical and econometric in nature, and there is no focus on the distributional implications of a multiple destinations model. The missing piece of the puzzle, then, is indeed a model of migration equilibrium and income distribution with multiple destinations.

The object of this paper is, first of all, to develop a Todaro-type model of migration equilibrium and income distribution where rural migrants face two urban destinations—a big city and a secondary town, each with its own stylized prospects. This is done in Section 2. Section 3 examines the properties of such an equilibrium focusing on the nature of the distributional differences between the three locations—specifically on whether there is a “poverty gradient” from rural to towns to cities, as has been found in the empirical literature (Ferré, Ferreira and Lanjouw, 2012). Section 4 turns to the motivating question of this paper—should public investment be targeted to towns or cities, if the objective is poverty reduction? This is analyzed in terms of the impact of job creation in the town or in the city. Conditions under which one or the other policy stance dominates are then derived.<sup>2</sup> Section 5 then presents an empirical

> 2 The analysis of the costs and benefits of different interventions to foster employment generation in towns and cities (urban and connecting infrastructure, urban governance, intergovernmental fiscal arrangements, place based interventions such as special economic zones etc.) falls beyond the scope of this paper. Roberts (2014) provides a useful discussion.

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