When spatial equilibrium fails: is place-based policy second best?

Place-based or geographically-targeted policy has been promoted as a way to help poor regions and the poor people who live there. Yet, such policy has often been attacked by economists as slowing needed economic adjustments, redirecting resources to lower productivity regions, and supporting political agendas rather than economic prosperity. The spatial equilibrium model in particular predicts that people readily move to the locations providing the highest expected utility, suggesting that policy interventions only impede needed adjustments. Given the high mobility of Americans, the spatial equilibrium model should then be most applicable to the US. We review the empirical evidence on whether the spatial equilibrium model applies and find that, even in the United States, people are not as mobile as the model suggests and that economic shocks have rather persistent effects. Although this suggests the potential need for place-based policy, we describe the informational and political economy conditions that need to be met before place-based policy can be effective