Optimal spatial policies, geography, and sorting

Abstract

We study optimal spatial policies in a quantitative trade and geography framework with spillovers and spatial sorting of heterogeneousworkers.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. JEL Codes: H21, H23, R12. C-The Author(s) 2020. Published by Oxford University Press on behalf of President and Fellows of Harvard College. All rights reserved. For Permissions,.