The political economy of interregional competition for firms

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.

Keywords
Median voter; Political economy; Subsidy competition



Publication type
Article in Journal

Peer reviewed
Yes

Publication status
In press

Year
2019

Journal
Regional Science and Urban Economics

Volume
2019

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