The Model

Abstract

In this chapter, a basic version of a new model of local resources and industrial mobility will be introduced and analysed. The model is a partial-equilibrium model where there are local resource constraints and industries differ with regard to their mobility. The framework allows to address the questions concerning optimal public policy which have been raised in the introduction, especially the issue of rentshifting targeted industrial policy: Does a local government want to favour mobile industries compared to immobile industries in order to raise local income? This chapter is structured along the following line: The main elements of the new model are presented in a non-formal way. Formal assumptions are made to specify the model. The market structures which may result are described. A look at the preferences of a local government leads to the best-reply curves and the noncooperative equilibrium in a game played by governments at different locations. Local and global cooperation are characterized. A graphical illustration of the model and its policy implications is given. Finally, a potential for a re-interpretation of the framework is pointed out and the extensions which will be given in subsequent chapters are outlined.