Optimal Dynamic Spatial Policy

We study the optimal allocation of population and consumption in a dynamic spatial general equilibrium model with frictional migration, where households' idiosyncratic location preference shocks are private information. We derive a recursive formula for the constrained-efficient allocation, capturing the trade-off between consumption smoothing and efficient migration. In a quantitative model calibrated to the US economy featuring both cross-state migration and risk-free savings, we find that the constrained-efficient allocation features lower population but higher average consumption in less productive states than the status quo, achieving efficiency and spatial redistribution simultaneously through dynamic incentives. In response to local negative productivity shocks, the constrained-efficient allocation features more front-loaded consumption profiles than the status quo, with systematic heterogeneity linked to the location’s pre-shock fundamentals.

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