Big data with big theory reveal how restrictive regional economic policies can lead to lower national productivity and higher inequality
Within a given country, different regions interact with each other in capital, labour, and product markets, resulting in cross-regional flows of these factors and goods. Regions also differ from each other locally in many ways, including the specific financial obstacles faced by local residents (Paulson and Townsend 2004, Ahlin and Townsend 2007, Karaivonov and Townsend 2014). Can these regional differences be enough to generate flows of factor inputs that are consistent with the capital flows and labour migration seen in the available data? Furthermore, can these regional differences generate the observed and often quite uneven geographic concentration in economic activity that we see on the ground?