Regional Cohesion Maintenance, Spillovers, and Imperfect Labor Mobility

We follow Wellisch (1994) in examining the efficiency of regional policymaking in a model with interregional spillovers and in which individuals are attached to regions for cultural reasons. In addition, we assume that regions desire to maintain their social cohesion. We postulate that regional cohesion maintenance can be adequately formalized in terms of Rawlsian regional welfare functions. We show that in the absence of material (e.g., initial incomes, worker abilities) differences across individuals and with identical consumption tastes, regional governments behave efficiently, internalizing interregional spillovers, provided they anticipate perfect incentive equivalence promoted by labor mobility.