Optimal Spatial Policies, Geography and Sorting

We study optimal spatial policies in quantitative trade and geography frameworks with spillovers and sorting of heterogeneous workers. We rst characterize ecient spatial transfers and the labor subsidies that would implement them. Then, we quantify the aggregate and distributional eects of implementing these policies in the U.S. economy. Under homogeneous workers and constant-elasticity spillovers, a constant labor subsidy over space restores efficiency regardless of micro heterogeneity in fundamentals and trade costs. In that case, the quantification suggests that the observed spatial transfers in the U.S. are close to ecient. Spillovers across heterogeneous workers create an additional rationale for place-specific subsidies to attain optimal sorting. Under heterogeneous workers, the quantication suggests that optimal spatial policies may require stronger redistribution towards low-wage cities than in the data, reduce wage inequality in larger cities, weaken spatial sorting by skill, and lead to signicant welfare gains. Spillovers across dierent types of workers are a key driving force behind these results.