Home-market vs. vote-market effect: Location equilibrium in a probabilistic voting model

This paper considers the location of manufacturing activities when regional policies are endogenous. We find that once the political economy of regional policy is explicitly taken into account, regional population size has an ambiguous effect on the level of regional subsidy, even though it plays a key role in determining the equilibrium spatial allocation of industry. In particular, the final allocation of firms depends both on the relative economic strengths of the two regions, as predicted by more orthodox economic geography models, as well as by their relative political strengths. (C) 2002 Elsevier B.V. All rights reserved.