This paper develops a model of firm location where communities differ by exogenous endowments of a factor of production. Firms choose to locate based on local subsidies to production. Community and firm optimal strategies are then examined. Through the introduction of information asymmetries about the communities' endowments, equilibrium bidding strategies for communities are found. The results show that auction institutions used by firms may in fact be signaling on the part of communities. These results also indicate that community bids reveal information, and restrictions on this bidding may do more harm than good.
This paper examines the effect of different education financing systems on the level and distribution of resources devoted to public education. We focus on California, which in the 1970's was transformed from a system of mixed local and state financing to one of effectively pure state finance and subsequently saw its funding of public education fall between ten and fifteen percent relative to the rest of the US. We show that a simple political economy model of public finance can account for the bulk of this drop. We find that while the distribution of spending became more equal, this was mainly at the cost of a large reduction in spending in the wealthier communities with little increase for the poorer districts. Our model implies that there is no simple trade-off between equity and resources; we show that if California had moved to the opposite extreme and abolished state aid altogether, funding for public education would also have dropped by almost ten percent.
Federal systems are crippled by power grabbing between central and regional governments, as well as burden-shifting schemes between regions. Existing models of federalisms assume regional diversity to account for inter-regional tension. However, these models set aside entirely the problem of inter-level competition. This paper presents a unified framework for understanding threats to federal stability. The model's n + 1 structure accomodates both dimensions of federal instability. Furthermore, this paper is able to offer a theoretical alternative to explanations of instability that rely upon regional diversity or citizen patriotism; identically selfish preferences, in the decentralized setting, can generate instability. Additionally, under certain institutional conditions, the paper offers an equilibrium that embraces the persistence of competition in a stable federation.