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Analyzing firm location decisions: is public intervention justified?

  • Owens, Raymond E.
  • Sarte, Pierre-Daniel

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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 86 (2002)
Issue (Month): 2 (November)
Pages: 223-242

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Handle: RePEc:eee:pubeco:v:86:y:2002:i:2:p:223-242
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  1. Albuquerque, Rui & Rebelo, Sergio, 2000. "On the dynamics of trade reform," Journal of International Economics, Elsevier, vol. 51(1), pages 21-47, June.
  2. Ray Owens & Pierre-Daniel Sarte, 1999. "Analyzing firm location decisions : is public intervention justified?," Working Paper 99-08, Federal Reserve Bank of Richmond.
  3. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
  4. 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.
  5. Antonio Ciccone & Robert E. Hall, 1995. "Productivity and the density of economic activity," Economics Working Papers 120, Department of Economics and Business, Universitat Pompeu Fabra.
  6. 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.
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