Abstract: We analyze the distributional and welfare effects of an inter-group relocation policy in games featuring strategic spillovers and externalities within and between groups of agents. Conclusions depend on whether in-group interactions feature strategic substitutes or complements, and on whether strategic complements are weak or strong. When groups differ in size, while in-and out-group strategic spillover effects have the same magnitude, there are welfare gains but the policy is not Pareto improving. When only in-and out-group strategic spillovers differ in magnitude, Pareto improving cases exist, and are fully characterized, under in-group strategic substitutes and strong complements. The policy has also a positive welfare effect under weak strategic complements. This case requires a higher degree of heterogeneity in fundamentals for the policy to be Pareto improving.
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