NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Optimal Spatial Policies, Geography and Sorting

Pablo Fajgelbaum, Cecile Gaubert

NBER Working Paper No. 24632
Issued in May 2018, Revised in November 2019
NBER Program(s):International Trade and Investment Program

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.

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Document Object Identifier (DOI): 10.3386/w24632

 
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