Personal redistribution and the regional allocation of public investment

Abstract

How should an equity-motivated policy-maker allocate public capital (infrastructure) across regions. Should (s)he aim at reducing interregional differences in per capita output, or at maximizing total output? Such a normative question is examined in a model where the policy-maker is exclusively concerned about personal inequality and has access to two policy instruments: (i) a personal tax-transfer system (taxation is distortionary), and (ii) the regional allocation of public investment. I show that the case for public investment as a significant instrument for interpersonal redistribution is rather weak. In the most favorable case, when the tax code is constrained to be uniform across regions, it is optimal to distort the allocation of public investment in favor of the poor regions, but only to a limited extent. If the tax code can vary across regions, then the optimal policy may involve an allocation of public investment distorted in favor of the rich regions.