Working Paper: CEPR ID: DP1324
Authors: Uwe Walz; Dietmar Wellisch
Abstract: We develop a model in which two regional governments compete for a mobile oligopolistic firm by publicly providing local inputs. The central mechanism of our model is the interaction of an agglomeration advantage (partial non-rivalness of the local input) and an agglomeration disadvantage (fixed costs associated with the change of location of firms). We show that the central government provides an efficient level of local inputs and induces a spatially efficient allocation of firms. The decentralized provision of local inputs by regional governments, however, leads in most cases to an inefficient allocation.
Keywords: public provision of local inputs; firm location; oligopoly
JEL Codes: H40; H70; L13; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decentralized provision of local inputs by regional governments (H77) | inefficient allocation of firms (D21) |
| low fixed costs (D22) | efficient spatial allocation and public input provision (D61) |
| high fixed costs (G31) | inefficiently high levels of public inputs (H49) |
| high fixed costs (G31) | excessive agglomeration (R11) |
| central government (H10) | efficient levels of public inputs and spatial allocation (H40) |
| decentralized outcome (D79) | inefficient allocation (most scenarios of fixed costs) (D61) |