Local Government Portfolios and Regional Growth: Some Combined Dynamic CGE/Optimal Control Results

A theoretical policy model is presented that combines regional dynamic CGE modeling and optimal control to explore the role of local government taxation and expenditure in enhancing regional growth. It contributes to the regional CGE literature by explicitly solving for an optimal policy and augments earlier regional optimal control models by adding endogenous optimization of producer and consumer agents in response to endogenously determined prices. Results of three policy regimes are analyzed in terms of gains in the objective function, impacts on income inequality, and sensitivity to model parameterization.