Unpacking Aggregate Welfare in a Spatial Economy

How do regional productivity shocks or transportation infrastructure improvements affect aggregate welfare? In a general class of spatial equilibrium models, we provide a nonparametric formula to express aggregate welfare changes as changes in technology (Fogel 1964, Hulten 1978), spatial dispersion of marginal utility, fiscal externalities, technological externalities, and redistribution. We also use this characterization to derive a general optimal spatial transfer formula and show that the technology term alone summarizes aggregate welfare changes from technological shocks whenever optimal spatial transfers are in place. We apply our framework to study welfare gains from improving the US highway network. We find that changes in spatial dispersion of marginal utility, and to a lesser extent fiscal externalities, are as important as technological externalities in explaining the average and heterogeneity of welfare gains.

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