Place-Based Policies: Lessons from Theory

We revisit the rationale for place-based policies through the lens of a general urban framework that incorporates density spillovers. We draw six main lessons from theory. First, the spatial allocation is inefficient even when spillover elasticities are constant across regions. Therefore, agglomeration nonlinearities are not necessary to justify policy intervention. Second, with constant spillover elasticities, targeting regions is not necessary: a national wage subsidy combined with a lump sum tax to finance it is optimal. Third, beyond the constant-elasticity case, the optimal labor subsidy for a region equals its spillover elasticity. Fourth, place-based policies that favor low-wage locations on efficiency grounds are justified under either negative effects from density, higher spillover elasticities in low-wage locations, or across-skill spillovers that favor more mixing in low-wage areas. Fifth, government spending on infrastructure, investment incentives, or housing policies cannot optimally address externalities from labor density. Sixth, housing supply elasticities do not influence the optimal place-based policies