Local Public Goods and the Spatial Distribution of Economic Activity

Arthur Guillouzouic (), Emeric Henry and Joan Monras
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Arthur Guillouzouic: IPP - Institut des politiques publiques, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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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.

Keywords: Local public goods; Public service; Market power; Spatial economics (search for similar items in EconPapers)
Date: 2021-06-01
New Economics Papers: this item is included in nep-eur, nep-geo and nep-ure
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Related works:
Working Paper: Local Public Goods and the Spatial Distribution of Economic Activity (2021)
Working Paper: Local Public Goods and the Spatial Distribution of Economic Activity (2021)
Working Paper: Local Public Goods and the Spatial Distribution of Economic Activity (2021)
Working Paper: Local Public Goods and the Spatial Distribution of Economic Activity (2021)
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