Analyzing Firm Location Decisions: Is Public Intervention Justified?

34 Pages Posted: 26 Nov 2012

See all articles by Raymond E. Owens

Raymond E. Owens

Federal Reserve Bank of Richmond

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Date Written: June 1, 1999

Abstract

This paper develops a two-region model of firm migration where moving is costly and firms have market power. In this setting, the decentralized equilibrium generates excessive inertia in firm movement relative to the 'first best' solution. Because the decentralized solution is inefficient, the widespread notion that inducing firm movement between regions yield no net social gain does not necessarily hold. That is, firm migration does not amount to a 'zero sum.' Moreover, given the presence of inertia, and contrary to the prevalent view, we show that targeted subsidies that alleviate moving costs can lead to a 'second best' outcome. We also show that once a dynamic dimension is considered, moving cost subsidies, while potentially welfare improving in a present value sense, may nevertheless generate transitional welfare costs in the short run. Consequently, it may be especially misleading to mainly consider contemporaneous conditions in evaluating regional incentive programs.

Keywords: Firm migration, inertia, location subsidies, location incentives

JEL Classification: R0, R3, E6

Suggested Citation

Owens, Raymond E. and Sarte, Pierre-Daniel, Analyzing Firm Location Decisions: Is Public Intervention Justified? (June 1, 1999). FRB Richmond Working Paper No. 99-8. Available at SSRN: https://ssrn.com/abstract=2130585 or http://dx.doi.org/10.2139/ssrn.2130585

Raymond E. Owens (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Pierre-Daniel Sarte

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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