People, Places, and Public Policy: Some Simple Welfare Economics of Local Economic Development Programs

TLDR

Geographic disparities in wages, income, and unemployment are widespread, and place‑based policies that target disadvantaged areas aim to reshape local economic activity, yet systematic economic analysis of their effects has only recently emerged. The study asks who gains from place‑based interventions, whether national benefits exceed costs, and which types of interventions are most effective. To answer these questions, the authors build a simple spatial equilibrium model that evaluates the welfare impacts of place‑based policies and tests their economic rationales against recent evidence. The analysis yields policy lessons and suggests avenues for future research on the design and evaluation of place‑based programs.

Abstract

Most countries exhibit large and persistent geographical differences in wages, income, and unemployment rates. A growing class of place-based policies attempts to address these differences through public investments and subsidies that target disadvantaged neighborhoods, cities, or regions. Place-based policies have the potential to profoundly affect the location of economic activity, along with the wages, employment, and industry mix of communities. These programs are widespread in the United States and throughout the world but have only recently been studied closely by economists. We consider the following questions: Who benefits from place-based interventions? Do the national benefits outweigh the costs? What sorts of interventions are most likely to be effective? To study these questions, we develop a simple spatial equilibrium model designed to characterize the welfare effects of place-based policies on the local and the national economy. Using this model, we critically evaluate the economic rationales for place-based policies and assess the latest evidence on their effects. We conclude with some lessons for policy and directions for future research.