How Aggregate Uncertainty Shapes the Spatial Economy

Peter Egger and his colleagues propose a solution of the system of individual dynamic optimal-control problems under rational expectations as a Mean Field Game, in discrete time and state space, preserving the full nonlinear structure of the problem. Using a calibration for France, they demonstrate that welfare outcomes and the spatial distribution of labour differ systematically from those under perfect foresight. Accounting for decisions made under aggregate uncertainty significantly reshapes the patterns of labour reallocation, both during transitions and in the long run.

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