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Strategic Policy Competition with Public Infrastructure


  • R. Nahuis
  • P.J.G. Tang


Governments try to attract firms and jobs by investing in international infrastructure. We analyse this type of strategic policy competition in a three-country model of monopolistic competition. What governments compete for, is to obtain a so called ‘hub’ position. A hub is a relatively well connected location in a transport network. A hub might thus be an attractive location for firms. However, for a small or backward country the hub position, due to infrastructure investment, is overwhelmed by the disadvantage of a small home-market. As investment to become a hub triggers an investment response from other countries, a backward country is unlikely to keep its relatively attractive position. An attractive location is only sustainable if investment applies to point infrastructure and builds upon a natural advantage (e.g. an harbour). The game of action and reaction delivers socially undesirably high levels of infrastructure investment if transport costs are already low and firm mobility is high.

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  • R. Nahuis & P.J.G. Tang, 2004. "Strategic Policy Competition with Public Infrastructure," Working Papers 04-24, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:0424

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    Infrastructure; Industrial Location; Policy Competition; Monopolistic Competition; International Trade;

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