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Analyzing firm location decisions : is public intervention justified?

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  • Ray Owens
  • Pierre-Daniel Sarte

Abstract

This paper develops a two-region model of firm migration where moving is costly and firms have market power. In this setting, the decentralized equilibrium generates excessive inertia in firm movement relative to the 'first best' solution. Because the decentralized solution is inefficient, the widespread notion that inducing firm movement between regions yield no net social gain does not necessarily hold. That is, firm migration does not amount to a 'zero sum.' Moreover, given the presence of inertia, and contrary to the prevalent view, we show that targeted subsidies that alleviate moving costs can lead to a 'second best' outcome. We also show that once a dynamic dimension is considered, moving cost subsidies, while potentially welfare improving in a present value sense, may nevertheless generate transitional welfare costs in the short run. Consequently, it may be especially misleading to mainly consider contemporaneous conditions in evaluating regional incentive programs.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 99-08.

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Date of creation: 1999
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Handle: RePEc:fip:fedrwp:99-08

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Related research

Keywords: Industrial location ; Regional economics;

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References

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  1. Ciccone, Antonio & Hall, Robert E, 1996. "Productivity and the Density of Economic Activity," American Economic Review, American Economic Association, vol. 86(1), pages 54-70, March.
  2. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  3. Albuquerque, Rui & Rebelo, Sergio, 2000. "On the dynamics of trade reform," Journal of International Economics, Elsevier, vol. 51(1), pages 21-47, June.
  4. Ray Owens & Pierre-Daniel Sarte, 1999. "Analyzing firm location decisions : is public intervention justified?," Working Paper 99-08, Federal Reserve Bank of Richmond.
  5. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
  6. Carlton, Dennis W, 1983. "The Location and Employment Choices of New Firms: An Econometric Model with Discrete and Continuous Endogenous Variables," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 440-49, August.
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Cited by:
  1. Rubén Hernández-Murillo, 2012. "Interjurisdictional competition with adverse selection," Working Papers 2012-052, Federal Reserve Bank of St. Louis.
  2. Vincent Dupont & Philippe Martin, 2006. "Subsidies to poor regions and inequalities: some unpleasant arithmetic," Journal of Economic Geography, Oxford University Press, vol. 6(2), pages 223-240, April.
  3. 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.

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