Quarterly Journal of Economics Vol. 135 No. 2 2020

Optimal Spatial Policies, Geography, and Sorting*

Pablo D. Fajgelbaum¹; Cecile Gaubert²

¹ University of California, Los Angeles, and National Bureau of Economic Research · ² University of California, Berkeley, National Bureau of Economic Research, and Centre for Economic Policy and Research

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.

DOI

10.1093/qje/qjaa001

Volume

135

Issue

2

Pages

959-1036

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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