Finance and Economics Discussion Series (FEDS)
November 2019
Local Ties in Spatial Equilibrium
Abstract:
If someone lives in an economically depressed place, they were probably born there. The presence of people with local ties - a preference to live in their birthplace - leads to smaller migration responses. Smaller migration responses to wage declines lead to lower real incomes and make real incomes more sensitive to subsequent demand shocks, a form of hysteresis. Local ties can persist for generations. Place-based policies, like tax subsidies, targeting depressed places cause smaller distortions since few people want to move to depressed places. Place-based policies targeting productive places increase aggregate productivity, since they lead to more migration.
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Keywords: Decline, Economic development, technological change, and growth, Labor and demographic economics, Local Labor Markets, Migration
DOI: https://doi.org/10.17016/FEDS.2019.080
PDF: Full Paper