Public input competition and agglomeration

Abstract

This paper analyzes the impact of public input competition in a New Economic Geography framework. It is shown that regional competition yields an overprovision of public inputs if trade costs are sizable while it leads to underprovision if regions are highly integrated. Moreover, public input competition assures a dispersion of industry as long as trade costs are high but induces agglomeration even for ex ante identical regions if trade costs have fallen below a certain value. Finally, a trade-off between regional convergence and efficiency arises since the efficient distribution of regional infrastructure requires full agglomeration for sufficiently low trade costs.