Advertising and city formation with local public goods

Tatsuaki Kuroda

The Annals of Regional Science, 1995, vol. 29, issue 4, 389-407

Abstract: This paper intends to integrate imperfect information into the Tiebout-type model so as to examine the role of information in city formation with local public goods. To do so, the author focuses on a specific land market in which land developers try to form cities by providing some quantity of local public goods as club goods. They advertise the location, rent, and service level of the public goods of the city, and homogeneous households have no alternative sources of information. A structure of information transmission following Butters (1977) is adopted which assumes a random process in the allocation of advertisements. Based on the model presented here, the following results are obtained: (1) All combinations of advertised rent and service level are on a curve which coincides with the income expansion path. This implies that the effect of the imperfectness of information may be mixed only with the variation caused by income heterogeneity. (2) Moreover, the equilibrium number of advertisements is socially optimal. (3) These results imply that, given the structure of information transmission, a free land market or city formation with imperfect information could still be justifiable.

Date: 1995
Note: Received: July 1992 / Accepted in revised form: February 1995
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