The political economy of interregional competition for firms

Publication date: Available online 17 October 2019Source: Regional Science and Urban EconomicsAuthor(s): Daniel Hopp, Michael KriebelAbstractThis paper studies interregional competition for a multinational firm when the bidding is decided by the median voter. We model the competition as an auction under full information between two asymmetric regions inhabited by low- and high-skilled individuals. We derive two results: First, the location decision is inefficient in most cases. Second, winning the auction is harmful for the region, if the political process and strong competition lead to subsidies which exceed the surplus created by a firm's location. This implies that restricting interregional competition for firms, e.g. regulating subsidies, may enhance welfare.
Source: Regional Science and Urban Economics - Category: Science Source Type: research