New Publication “Fiscal transfers in the spatial economy” by Tobias Seidel, together with Jens Südekum (DICE, CEPR and CESifo) and Marcel Henkel (University of Bern) in the American Economic Journal: Economic Policy.
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%.