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The political economy of interregional competition for firms

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  • Hopp, Daniel
  • Kriebel, Michael

Abstract

This 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.

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  • Hopp, Daniel & Kriebel, Michael, 2019. "The political economy of interregional competition for firms," Regional Science and Urban Economics, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:regeco:v:79:y:2019:i:c:s0166046217302673
    DOI: 10.1016/j.regsciurbeco.2019.103485
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    More about this item

    Keywords

    Median voter; Political economy; Subsidy competition;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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