Sorting winners and losers: using CGE models to assess income distribution effects of economic development choices

Cities regularly face a wide range of economic development choices that inevitably create both winners and losers within their communities. Proper assessment of the impacts of such choices requires not only an appropriate modelling framework but also explicit understanding and incorporation of a city’s income distribution priorities. This paper proposes that a computable general equilibrium (CGE) model, which includes a structured social welfare function, can provide precisely such a tool to fully evaluate economic development choices, tradeoffs and implications. We leverage such a model for a small Colorado city and simulate sector-specific expansionary economic development policies. We apply the framework to understand the gains and losses of two distinct groups, namely original residents versus new arrivals, likely to be affected by such choices, alongside the welfare impacts to the city as whole. JEL classification: R5, H7, O21