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Public Input Competition
Journal of Public Economics , 89(9/10), September 2005, pp. 1763-1788
Abstract: Public investment in infrastructure may help create agglomeration economies, by attracting mobile factors such as skilled labour. Competition among regions in public investment can then be destructive. This paper analyzes the Nash equilibria to a simple model of public input competition. Even though the regions are assumed identical, the equilibrium may not be symmetric. The problem with non-cooperative behaviour is not (only) that regions invest too much, but that too many regions may choose to invest. Depending on the parameter values, the Nash equilibrium may be efficient, may be inefficient or may not exist (at least not in pure strategies). Better mobility among regions leads to more aggressive competition. The analysis suggests that rents from public investment may be dissipated by governments' competition to attract mobile factors.
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