Strategic Public Provision of Local Inputs for Oligopolistic Firms in the Presence of Endogenous Location Choices

We develop a model in which two regional governments compete for a mobile oligopolistic firm by publicly providing local inputs. The central mechanism of our model is the interaction of an agglomeration advantage (partial non-rivalness of the local input) and an agglomeration disadvantage (fixed costs associated with the change of location of firms). We show that the central government provides an efficient level of local inputs and induces a spatially efficient allocation of firms. The decentralized provision of local inputs by regional governments, however, leads in most cases to an inefficient allocation.