Abstract
We develop a model in which two regional governments compete for a mobile oligopolistic firm by providing local public inputs. The central mechanism of our model is the interaction of an agglomeration advantage (partial nonrivalness of the local public inputs) and an agglomeration disadvantage (costs associated with the change of location of firms). We show that a central government of both regions induces an interregionally optimal allocation of firms by providing the optimal levels of local public inputs. The decentralized provision of local public inputs by regional governments, however, leads in most cases to a (interregionally) suboptimal allocation.
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Walz, U., Wellisch, D. Strategic provision of local public inputs for oligopolistic firms in the presence of endogenous location choice. Int Tax Public Finan 3, 175–189 (1996). https://doi.org/10.1007/BF00399909
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DOI: https://doi.org/10.1007/BF00399909