Many countries shift substantial public resources across jurisdictions to mitigate spatial economic disparities. We use a general equilibrium model with multiple asymmetric regions, labor mobility, and costly trade to carve out the aggregate implications of fiscal transfers. Calibrating the model for Germany, we find that transfers indeed deliver smaller disparities across regions. This comes at the cost of lower national output, however, because economic activity is diverted away from core cities and toward remote areas with low productivity. But despite this loss in output per capita by about 2 percent in our baseline specification, welfare still increases by 0.07 percent because the transfer scheme countervails overcongestion in large cities. If the optimal transfer regime was implemented, welfare would increase by 0.06 percent.
Henkel, Marcel, Tobias Seidel, and Jens Suedekum.
"Fiscal Transfers in the Spatial Economy."
American Economic Journal: Economic Policy,
Intergovernmental Relations; Federalism; Secession
Geographic Labor Mobility; Immigrant Workers
Size and Spatial Distributions of Regional Economic Activity
General Equilibrium and Welfare Economic Analysis of Regional Economies
Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics