Market competition, relocation and lobbying*

This paper attempts to answer whether market competition makes relocation of a firm to an inefficient location easier through lobbying. It models a case where a larger market is more efficient location choice of the firm. It shows that if the agglomeration effect is not too high, the presence of market competition at its original location makes relocation easier. However, “race to the bottom” competition between the locations fails to take advantage of the market competition; no relocation takes place. The paper shows that instead of lobbying only with the firm, if the legislatures of the smaller market also lobby with legislatures of the larger market, “race to the bottom” is avoided, and the scope for relocation opens. At such an equilibrium, market competition makes relocation to a much smaller market possible.