Technology, Agglomeration, and Regional Competition for Investment

Competition for firms by region has a long-standing history, and the academic literature has debated whether such competition is efficient. We develop a model that explores technology development by firms facing regional competition for their investment and examine the endogenous determination of region policy, firm technology, and agglomeration externalities. We find a new source of inefficiency - regional competition leads firms to inefficiently distort their development and selection of production technology to improve their standing in the regional competition for their investment. We show that these inefficient firm decisions on technology and location can also weaken agglomeration externalities.

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