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Optimal Spatial Policies, Geography and Sorting

Author

Listed:
  • Pablo Fajgelbaum
  • Cecile Gaubert

    (UC Berkeley)

Abstract
We study optimal spatial policies in quantitative trade and geography frameworks with spillovers and sorting of heterogeneous workers. We rst characterize ecient spatial transfers and the labor subsidies that would implement them. Then, we quantify the aggregate and distributional eects of implementing these policies in the U.S. economy. Under homogeneous workers and constant-elasticity spillovers, a constant labor subsidy over space restores efficiency regardless of micro heterogeneity in fundamentals and trade costs. In that case, the quantification suggests that the observed spatial transfers in the U.S. are close to ecient. Spillovers across heterogeneous workers create an additional rationale for place-specific subsidies to attain optimal sorting. Under heterogeneous workers, the quantication suggests that optimal spatial policies may require stronger redistribution towards low-wage cities than in the data, reduce wage inequality in larger cities, weaken spatial sorting by skill, and lead to signicant welfare gains. Spillovers across dierent types of workers are a key driving force behind these results.

Suggested Citation

  • Pablo Fajgelbaum & Cecile Gaubert, 2018. "Optimal Spatial Policies, Geography and Sorting," 2018 Meeting Papers 1319, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:1319
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    2. Esteban Rossi-Hansberg & Pierre-Daniel G. Sarte & Felipe Schwartzman, 2019. "Cognitive Hubs and Spatial Redistribution," Working Paper 19-16, Federal Reserve Bank of Richmond.
    3. Farrokhi, Farid & Jinkins, David, 2019. "Wage inequality and the location of cities," Journal of Urban Economics, Elsevier, vol. 111(C), pages 76-92.
    4. Stephan Maurer & Ferdinand Rauch, 2023. "Economic geography aspects of the Panama Canal," Oxford Economic Papers, Oxford University Press, vol. 75(1), pages 142-162.
    5. Felipe Schwartzman, 2017. "Inequality Across and Within US Cities around the Turn of the Twenty-First Century," Economic Quarterly, Federal Reserve Bank of Richmond, issue Q1-Q4, pages 1-35.
    6. Treb Allen & Costas Arkolakis, 2022. "The Welfare Effects of Transportation Infrastructure Improvements," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(6), pages 2911-2957.
    7. Coen-Pirani, Daniele & Sieg, Holger, 2019. "The impact of the Tax Cut and Jobs Act on the spatial distribution of high productivity households and economic welfare," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 44-71.
    8. Victor Couture & Cecile Gaubert & Jessie Handbury & Erik Hurst, 2019. "Income Growth and the Distributional Effects of Urban Spatial Sorting," NBER Working Papers 26142, National Bureau of Economic Research, Inc.
    9. Anthony Howell, 2020. "Picking 'winners' in space: Impact of spatial targeting on firm performance in China," Journal of Regional Science, Wiley Blackwell, vol. 60(5), pages 1025-1046, November.
    10. Tilman Graff, 2018. "Spatial Inefficiencies in Africa’s Trade Network," CSAE Working Paper Series 2018-17, Centre for the Study of African Economies, University of Oxford.
    11. Farid Farrokhi, 2021. "Skill, Agglomeration, And Inequality In The Spatial Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(2), pages 671-721, May.
    12. Nicolas Jannin & Aurélie Sotura, 2019. "This Town Ain't Big Enough? Quantifying Local Public Goods Spillovers," Working Papers halshs-02160251, HAL.
    13. Nicolas Jannin & Aurelie Sotura, 2020. "This Town Ain't Big Enough? Quantifying Public Good Spillovers," Working papers 796, Banque de France.
    14. Wookun Kim, 2023. "Migration, Commuting, and the Spatial Distribution of Public Spending," Departmental Working Papers 2305, Southern Methodist University, Department of Economics.
    15. Nicolas Jannin & Aurélie Sotura, 2019. "This Town Ain't Big Enough? Quantifying Local Public Goods Spillovers," PSE Working Papers halshs-02160251, HAL.

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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