On the Macroeconomic Impact of a Regional Development Policy with Endogenous Residential Choice

This paper develops a simple two-region endogenous growth model in which individuals must choose where to reside and the government decides the amount of productive public investments for each area. In such a framework, we analyze the implications of a change in government’s regional policy on individuals’ residential choice, growth, inequality and welfare. In doing so, we put in evidence the key role played by the strength of congestion effects in production. When they are strong, we show that an increase in the amount of public infrastructure in the poor region not only increases growth and welfare but also reduces economywide inequalities. Therefore, there is no trade-off between growth, welfare and inequality. Interestingly, we also show that inequality can always be dampened if the development gap across regions is initially high.