Local Public Goods and the Spatial Distribution of Economic Activity

55 Pages Posted: 14 May 2021

See all articles by Arthur Guillouzouic

Arthur Guillouzouic

Institut des politiques publiques (PSE); Sciences Po - Department of Economics

Emeric Henry

Sciences Po

Joan Monras

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Barcelona Graduate School of Economics (Barcelona GSE)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2021

Abstract

Using French data, we provide: a) causal evidence that a drop in local public goods provision decreases private sector activity, and b) evidence consistent with monopsony power of the public sector in local labor markets. We introduce a public sector with these two key characteristics in an otherwise standard spatial equilibrium model, and show that it delivers the main stylized facts established in our data, in particular, that the share of the public sector relative to the private is independent of the productivity of the city. We emphasize the tradeoffs between allowing governments to freely choose local public employment and wages (as in most of the US public sector), versus imposing rules that constrain public sector pay with some indexation to the local cost of living (as in many European countries). We show that wage indexation limits monopsony power -- leading to a larger public sector -- and is optimal if the indexation is sufficiently strong.

JEL Classification: H41, J42, J45, R12

Suggested Citation

Guillouzouic, Arthur and Henry, Emeric and Monras, Joan, Local Public Goods and the Spatial Distribution of Economic Activity (April 2021). CEPR Discussion Paper No. DP16085, Available at SSRN: https://ssrn.com/abstract=3846194

Arthur Guillouzouic (Contact Author)

Institut des politiques publiques (PSE) ( email )

48 boulevard Jourdan
Paris, 75014
France

Sciences Po - Department of Economics ( email )

28, rue des Saints-Pères
Paris, Paris 75007
France

Emeric Henry

Sciences Po ( email )

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France

Joan Monras

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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