The Economics of Inter-City Competition in Financial and Distribution Markets

Abstract

We introduce a model of inter-city competition within a multidimensional framework. More specifically, we extend a single-sector model to one comprising two sectors, namely, a financial sector and a distribution sector in a three-stage sequential-game framework. There are two types of infrastructure, with one for each sector. The government of each city can build the infrastructure necessary to increase the competitiveness of the relevant sector. However, given that resources are limited, each city has to decide on which type of infrastructure to build, as well as on which elements of that type they wish to invest in. Under this framework, we show that the relative abundance of resources, the initial costs of providing services, and the relative effectiveness of the infrastructure determine the amount of infrastructure the government decides to build, and thus the outcome of the game.