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Optimal Spatial Policies, Geography and Sorting

Pablo Fajgelbaum () and Cecile Gaubert
Additional contact information
Cecile Gaubert: UC Berkeley

No 1319, 2018 Meeting Papers from Society for Economic Dynamics

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.

New Economics Papers: this item is included in nep-dge, nep-geo and nep-ure
Date: 2018
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