Fiscal Transfers in the Spatial Economy
- American Economic Journal: Economic Policy (Forthcoming)
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 towards remote areas with low productivity.
But despite this loss in output per capita by about 2% in our baseline
specification, welfare still increases by 0.07% because the transfer scheme
countervails over-congestion in large cities. If the optimal transfer regime was
implemented, welfare would increase by 0.06%.
Forthcoming Article Downloads