Interjurisdictional competition with adverse selection
AbstractIn this paper we study competition among non-benevolent local governments for mobile firms and evaluate the consequences of imposing alternative regimes of competition. In our model politicians act as regulators that offer incentives in the form of recommended output levels and socially-costly transfers to induce firms, which have private information on their costs, to operate in their community. Politicians fail to estimate correctly the social costs of public funds and competition drives firms' information rents to higher levels than under a cooperative regime. Therefore, from the perspective of a benevolent federation, aggregate welfare is reduced and constitutional constraints on the competition process may be desirable. Imposing a system of coarser policy instruments improves welfare, even when politicians are benevolent, because it reduces the costly rents that are granted to firms in equilibrium –at the cost of distorting output choices. We find that gains from resorting to constitutional constraints are maximal when communities are identical, but if the extent of asymmetry between locations increases, the advantages of the constrained regime decrease and can be overturned, because it prevents the more productive locations from attracting the more efficient firms.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-052.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-17 (All new papers)
- NEP-CTA-2012-11-17 (Contract Theory & Applications)
- NEP-PBE-2012-11-17 (Public Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Larry Epstein & Michael Peters, 1996.
"A Revelation Principle For Competing Mechanisms,"
peters-96-02, University of Toronto, Department of Economics.
- Becker, Gary S & Mulligan, Casey B, 2003.
"Deadweight Costs and the Size of Government,"
Journal of Law and Economics,
University of Chicago Press, vol. 46(2), pages 293-340, October.
- Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 144, Chicago - Center for Study of Economy and State.
- Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," NBER Working Papers 6789, National Bureau of Economic Research, Inc.
- Spulber, Daniel F., 1989. "Product variety and competitive discounts," Journal of Economic Theory, Elsevier, vol. 48(2), pages 510-525, August.
- Ray Owens & Pierre-Daniel Sarte, 1999.
"Analyzing firm location decisions : is public intervention justified?,"
99-08, Federal Reserve Bank of Richmond.
- Owens, Raymond E. & Sarte, Pierre-Daniel, 2002. "Analyzing firm location decisions: is public intervention justified?," Journal of Public Economics, Elsevier, vol. 86(2), pages 223-242, November.
- Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 529-62, Winter.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).
If references are entirely missing, you can add them using this form.