Endogenous Location Choice Research Articles

Location of Firms and Outsourcing

We analyze the location of final goods producers under spatial competition with strategic input price determination by firm-specific input suppliers when the final goods producers undertake complete outsourcing or bi-sourcing. Under complete outsourcing, the final goods producers locate closer as the distance between the input suppliers decreases, but the distance between the final goods producers may increase or decrease with the transportation costs of the consumers and the transportation costs between the input suppliers and the final goods producers depending on the distance between the input suppliers. The possibility of bi-sourcing reduces the benefit from saving the transportation costs between the input suppliers and the final goods producers, and creates effects which are opposite to those under complete outsourcing. Thus, our results differ significantly from the extant literature considering either no strategic input price determination or strategic input price determination under competition in the input market. We also discuss the implications on the profits, consumer surplus and welfare, and the implications of endogenous location choice of the input suppliers.

Talent in the public sector: The role of migration and housing policies

Misallocating talent can have significant costs for society. Previous studies have shown that reducing mobility barriers enhances talent allocation across regions, yet the impact on talent allocation between the public and private sectors, as well as the quality of the public sector, remains unclear. This paper presents a two-city, two-sector model incorporating endogenous location and occupational choices to address this gap. We find that changes in the value or supply of residence quotas (hukou) do not always influence public employment quality. We also analytically characterize the conditions under which they do, which involve the value and supply of hukou, wages in the government sector, and productivity differentials across cities. In the same environment, however, changes in land availability do not affect talent distribution across the public and private sectors.

Effect of Syrian Refugees on Native Family Formation: Marriage and Divorce Trends in Turkey

After the civil war in Syria, Turkey faced a massive refugee wave, making Turkey the top refugee-hosting country in the world. Besides the economic burden of this refugee population, various field surveys reveal that Turkish citizens have some negative perceptions about the refugees. One of the leading concerns on refugees is their possible effects on native family formation by affecting marriage and divorce rates. This study examines the effect of the Syrian refugees on family formation by comparing the trends in different geographical areas of Turkey. While border cities and relatively developed cities host a significant number of Syrians, there are few Syrians living in cities away from the border. By conducting spatial analysis, the study checks whether there is a change in divorce/marriage rates in cities with a high concentration of refugees compared to cities with fewer refugees. By considering the endogenous location choice of the refugees, the study proposes a distance-based instrument to overcome the endogeneity problem in a Difference-in-Differences setting. Results indicate that the refugees do not affect the existing trends in divorce rates and divorce cases. However, there is a limited adverse impact on official marriages. A 1% increase in the refugee ratio corresponds to a 0.03% reduction in official marriages.

Immigration and preferences for redistribution in Europe

AbstractWe examine the relationship between immigration and preferences for redistribution in Europe using a newly assembled dataset of immigrant stocks for 140 regions in 16 Western European countries. Exploiting within-country variations in the share of immigrants at the regional level, we find that native respondents display lower support for redistribution when the share of immigrants in their residence region is higher. This negative association is driven by regions of countries with relatively large welfare states and by respondents at the center or at the right of the political spectrum. It is stronger when immigrants originate from Middle-Eastern or Eastern European countries, are less skilled than natives and experience more residential segregation. These results are unlikely to be driven by immigrants’ endogenous location choices, that is, by welfare magnet effects or by immigrants’ sorting into regions with better economic opportunities. They are also robust to instrumenting immigration using a standard shift-share approach.

Spatial pricing and collusion

AbstractThe stability of collusion is compared assuming quadratic transport costs under two spatial pricing schemes, uniform mill pricing and spatial price discrimination. This comparison uniquely allows fully endogenous location choice and examines when two firms collude, when two of three firms collude and when three firms collude. Spatial price discrimination facilitates collusion more than uniform pricing in the first two of the three examinations but not in the third. This heterogeneity argues that the presence of price discrimination by itself does not inform antitrust authorities about the likelihood of collusion.

Sea Level Rise and Portfolio Choice

Many households face uninsurable background risks due to future sea level rise (SLR). Using detailed local variation in SLR exposure and disaggregated geographic information on households in the United States, I show that SLR exposed households participate less in the stock market compared to their unexposed counterparts within the same neighborhood. This effect is driven by long-run SLR risks as opposed to short-run flood risks and is elevated at times when attention to climate change is high. I provide causal evidence of the effect of SLR risks on household portfolio choices by exploiting plausibly exogenous variation stemming from the adoption of state-led climate change adaptation plans that reduced households' SLR risks. Additional tests isolate the effect of SLR exposure as a background risk from alternative explanations, including changes in house prices, past flooding experiences, endogenous location choices, political beliefs, or differences in risk preferences.

Locational effects and the cost of corporate bonds: the role of information

AbstractThe public yield spreads of bonds vary widely between Chinese provinces/municipalities, with the average for the highest province double that of the lowest one. Although we find that these patterns are mainly attributable to economic and legal conditions, locational effects like geographic distance and public firm credit ratings also appear to be contributory. We show that these effects are induced by different regional informational environments and are robust to controlling for potential endogenous location choices.

Do pollution havens restrict tourism-led growth? Achieving sustainable tourism via a mix of environmental and tourism policies

Using an R&D-based growth model with endogenous location choices and movement of tourists, we investigate the effect that a grandfathered emission permit and an airfare including alien tax have on international tourism. We find that improved environmental quality, achieved by the restricted allocation of grandfathered permits, leads to tourism-led growth. That is, both the number of tourists and the tourism growth rate increase. By contrast, we find that worsened environmental quality, caused by generous allocation of grandfathered permits and reduced airfares including alien tax, leads to the creation of pollution havens because the policy prompts polluting firms to relocate to the area with the respective regulations. Our findings imply sustainable tourism can be achieved when the respective environmental and tourism policies are implemented.

Beyond the average: Ethnic capital heterogeneity and intergenerational transmission of education

Estimating the effect of ethnic capital on human capital investment decisions is complicated by the endogeneity of immigrants’ location choice, unobserved local correlates and the reflection problem. We exploit the institutional setting of a rare immigrant settlement policy in Germany, that generates quasi-random assignment across regions, and identify the causal impact of heterogeneous ethnic capital on educational outcomes of children. Correcting for endogenous location choice and correlated unobservables, we find that children of low-educated parents benefit significantly from the presence of high-educated parental peers of the same ethnicity. High educated parental peers from other ethnicities do not influence children’s learning achievements. Our estimates are unlikely to be confounded by the reflection problem since we study the effects of parental peers’ human capital which is pre-determined with respect to children’s outcomes. Our findings further suggest an increase in parental aspirations as a possible mechanism driving the heterogeneous ethnic capital effects, implying that profiling peers or ethnic role models could be important for migrant integration policies.

Re-evaluating the impact of immigration on the U.S. rental housing market

Previous studies provide evidence that immigration increases housing prices and rents. To deal with endogenous location choices of immigrants, these studies often use a shift-share instrumental variable approach. This approach, however, fails to adequately account for the natural attraction of immigrants to cities with thriving economies. High-immigration cities provide more economic opportunities and thus exhibit persistently rising housing prices and rents. This paper improves upon the traditional empirical approach by explicitly controlling for initial city characteristics that lead to both increases in immigration and the evolution of rents. Results suggest that after controlling for endogenous sorting of immigrants, the positive effect of immigration on rents is attenuated. While the impact of immigrant inflows is smaller, an extension of the main results suggests the effects of immigration on rents remains larger than that of native inflows.

Immigration and Preferences for Redistribution in Europe

Abstract We examine the relationship between immigration and preferences for redistribution in Europe using a newly assembled dataset of immigrant stocks for 140 regions in 16 Western European countries. Exploiting within-country variations in the share of immigrants at the regional level, we find that native respondents display lower support for redistribution when the share of immigrants in their residence region is higher. This negative association is driven by regions of countries with relatively large welfare states and by respondents at the center or at the right of the political spectrum. It is stronger when immigrants originate from Middle-Eastern or Eastern European countries, are less skilled than natives and experience more residential segregation. These results are unlikely to be driven by immigrants’ endogenous location choices, that is, by welfare magnet effects or by immigrants’ sorting into regions with better economic opportunities. They are also robust to instrumenting immigration using a standard shift-share approach.

Immigration, Ethnic Diversity, and Political Outcomes: Evidence from Denmark

AbstractI study the impact of immigration and increasing ethnic diversity on political outcomes in immigrant‐receiving countries, focusing on immigration and election outcomes in Danish municipalities between 1981 and 2001. A novel instrumental variable strategy based on historical housing stock data addresses issues of endogenous location choices of immigrants and a rich set of control variables is employed to isolate ethnic diversity effects from those of other immigrant characteristics. Increases in local ethnic diversity lead to rightward shifts in election outcomes by shifting electoral support away from traditional “big government” left‐wing parties and towards anti‐immigrant nationalist parties. This holds for both local and national elections.

Immigration and the Labor Market Outcomes of Natives in Developing Countries: A Case Study of South Africa

AbstractUsing South African census data from 2001, 2007, and 2011, I examine the effect that immigration had on labor market outcomes of native-born black South Africans. Using instrumental variables to control for the potential endogenous location choices of immigrants to South Africa, the results show that immigrant inflows decreased the employment-to-population ratios and total annual income of black native-born South Africans. Additionally, results suggest a negative effect of immigrant inflows on the employment ratio and total annual income of black native-born South Africans employed in the formal sector. Results show that immigration caused an intersectoral employment shift. For black male South Africans, the composition of the employed labor force shifted to the formal sector, and for black female South Africans, the composition of the employed labor force shifted to the informal sector.

My Precious! The Location and Diffusion of Scientific Research: Evidence from the Synchrotron Diamond Light Source

We analyse the impact of the establishment of the Diamond Light Source synchrotron, a large basic scientific research facility in the UK, on the geographic distribution of related research. To account for the potentially endogenous location choice of the synchrotron, we rely on the availability of a ‘runner‐up’ site. We use data on academic publications to trace the geographic distribution of related scientific inputs and outputs. Our results suggest that proximity to Diamond had a positive impact on the output of related research. This proximity effect appears to be driven by an increase in inputs rather than the productivity of scientists.

Optimal Emission Tax with Endogenous Location Choice of Duopolistic Firms

This study explores an optimal (pre-committed or ex-ante) environmental tax policy in a three-stage game in which polluting firms strategically choose the location of their plants after the government has chosen the optimal emission tax rate. We show not only that the optimal emission tax is non-decreasing with the declining cost of relocation (e.g., setup or fixed costs), or else, the progress of globalization but also that the firms may move back their relocated plants to the home country, causing the resulting welfare to decline. As a consequence, the domestic welfare varies in a non-monotonic way. We also show that such a counterintuitive non-monotonic relationship does not arise under time-consistent (ex-post) emission taxes.

Cournot and Bertrand Competition in a Model of Spatial Price Discrimination with Differentiated Products

AbstractThis study investigates spatial price discrimination with two types of market competition – price competition and quantity competition – and two kinds of cross-relations between goods – substitutes and complements – with endogenous location choices in a barbell model. The results herein present that the maximum differentiation (end point agglomeration) is the unique location equilibrium with substitutes (complements), irrespective of what type of competition. We demonstrate that if the unit transportation rate is sufficiently high, then consumer surplus, profits, and social welfare are higher under price competition than under quantity competition for both substitutes and complements. This means that introducing a spatial barrier to competition generated through transportation costs may solve the problem of inconsistency from the conflict interests between consumers, firms, and a social planner.

The arm's length principle, transfer pricing, and location choices

This paper examines the impacts of the arm's length principle on tax revenues under endogenous location choices. The results show that the level of transfer price depends not only on taxation policies, but also on firms’ location choices. An imposition of the arm's length principle on a multinational enterprise does not raise tax revenues under endogenous location choices. Such a result is in contrast to the common opinion of tax authorities regarding the regulation on transfer pricing.

A welfare analysis of global patent protection in a model with endogenous innovation and foreign direct investment

This paper constructs a North–South quality-ladder model in which foreign direct investment (FDI) is determined by the endogenous location choice of firms, and examines analytically how strengthening patent protection in the South affects welfare in the South. Strengthening patent protection increases the South's welfare by enhancing innovation and FDI, but it also allows the firms with patents to charge higher prices for their goods, which decreases welfare. However, the model shows that the former positive welfare effect outweighs the latter negative effect. Moreover, introducing the strictest form of patent protection in the South, that is, harmonizing patent protection in the South with that in the North, may maximize welfare in the South as well as in the North. Further, a similar result can also be obtained in a nonscale effect model.

Patent licensing and R&D competition with endogenous location choice

Patent licensing and R&D competition with endogenous location choice

Optimal Emission Tax with Endogenous Location Choice of Duopolistic Firms

This paper explores optimal environmental tax policy under which duopoly firms strategically choose the location of their plants in a simple three-stage game. We examine how the relationship between the optimal emission tax and the choice of location of duopoly firms affects the welfare of the home country. We characterize the relationship between the optimal emission tax and the fixed cost, depending on the degree of environmental damage from production. Finally, we show the existence of asymmetric equilibrium in which either firm chooses relocation of its plant even if the duopoly firms are identical ex ante.