The purpose of this dissertation is to study the causes, welfare effects, and policy implications of the decline of the Rust Belt. I develop a dynamic spatial equilibrium model which consists of a multi-region, multi-sector economy comprised of overlapping generations of heterogeneous individuals. Using several data sets that cover the time period from 1960-2010, I estimate the structural parameters of the model based on a simulated method of moments estimator. The empirical findings suggest that goods-producing firms located in the Rust Belt had a 13 percent relative productivity advantage in 1960 compared to the rest of the U.S., which shrank to approximately 3 percent by the end of the sample period in 2010. As a consequence, a large fraction of the decline of the Rust Belt can be attributed to the reduction in its location-specific advantage in the goods-producing sector. The transition of the U.S. economy to a service sector economy is a less significant factor. The decline of the Rust Belt generated significant differences in welfare between individuals residing in the Rust Belt and those residing in other areas, particularly for the less educated. Policy experiments show that the inequality in welfare can be significantly reduced by subsidizing labor costs in the Rust Belt or reducing mobility costs.