Optimal Spatial Policies, Geography and Sorting

71 Pages Posted: 25 May 2018 Last revised: 22 Apr 2023

See all articles by Pablo Fajgelbaum

Pablo Fajgelbaum

University of California, Los Angeles (UCLA) - Department of Economics

Cecile Gaubert

University of California, Berkeley - Department of Economics

Date Written: May 2018

Abstract

We study optimal spatial policies in a quantitative trade and geography framework with spillovers and spatial sorting of heterogeneous workers. We characterize the spatial transfers that must hold in efficient allocations, as well as labor subsidies that can implement them. There exists scope for welfare-enhancing spatial policies even when spillovers are common across locations. Using data on U.S. cities and existing estimates of the spillover elasticities, we find that the U.S. economy would benefit from a reallocation of workers to currently low-wage cities. The optimal allocation features a greater share of high skill workers in smaller cities relative to the observed allocation. Inefficient sorting may lead to substantial welfare costs.

Suggested Citation

Fajgelbaum, Pablo and Gaubert, Cecile, Optimal Spatial Policies, Geography and Sorting (May 2018). NBER Working Paper No. w24632, Available at SSRN: https://ssrn.com/abstract=3182228

Pablo Fajgelbaum (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Cecile Gaubert

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

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