Policy Sensitivity in Dynamic Optimization Models: A Study Remembering William Alonso’s Regional Modeling Perspectives

Although William Alonso began his illustrious career as an economic equilibrium modeler, he often was critical of formal mathematical models applied in the regional context. Regional computable general equilibrium (CGE) models have theoretical characteristics similar to the economic framework underlying his seminal Location and Land Use. However, their development and application have proceeded largely unheedful of the modeling concerns Alonso expressed for three decades following his classic 1964 publication. The current research summarizes the Alonso legacy to regional forecasting and policy impact modeling and expands regional CGE modeling in that context. A 20-period dynamic CGE/optimal control model of a simplified regional economy is used to determine paths of regional tax policy and public investment in physical infrastructure and human capital that maximize the present value of real disposable per capita income. Optimal results are compared with a baseline scenario in which a “passive†regional government simply sustains initial public infrastructure. Sensitivity of outcomes to model formulation is examined.