The political economy of interregional competition for firms

Daniel Hopp and Michael Kriebel

No 5616, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster

Abstract: This paper studies interregional competition for firms when the bidding is decided upon majority voting. 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, especially when the median voter is high-skilled. Second, winning the auction is harmful for the region if the political process and a 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. Furthermore, our model shows that countries with high redistributive taxes and a low-skilled majority have an advantage to attract foreign firms.

Keywords: median voter; political economy; subsidy competition; spillover (search for similar items in EconPapers)
JEL-codes: H23 H25 H31 P16 R11 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2016-10
New Economics Papers: this item is included in nep-bec, nep-cdm, nep-com, nep-pbe, nep-pol and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:cqe:wpaper:5616

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