Firm Location Choice in the Presence of a Free Rider Problem

In this paper we show that, in the presence of an investment that provides all firms in an industry with positive externalities, a firm may choose an ‘extreme policy’. Specifically, within the context of a locational game, we show that a firm may make a positive profit by locating outside a city, if in doing so it manages to induce other firms to undertake investments that they would not undertake if the first firm was located within the city. Our finding is likely to have implications for similar locational issues such as ones facing political parties.