ESTIMATING A DYNAMIC SPATIAL EQUILIBRIUM MODEL TO EVALUATE THE WELFARE IMPLICATIONS OF REGIONAL ADJUSTMENT PROCESSES: THE DECLINE OF THE RUST BELT

Abstract

This article develops and estimates a new dynamic spatial equilibrium model to study the regional transition dynamics and its impact on individual and aggregate welfare. The model consists of a multiregion, multisector economy comprised of overlapping generations of individuals with heterogeneous skills and mobility costs. The empirical findings suggest that a large fraction of the decline of the Rust Belt can be attributed to the reduction in its region-specific comparative advantage in the goods-producing sector. This decline generated significant differences in welfare across regions. Policy experiments show that such inequality can be significantly reduced through place-based policies.