On the effects of capital mobility on local infrastructure policy and rent-seeking

This paper deals with the influence of capital mobility on local infrastructure policy and on rent-seeking activities of local interest groups. It employs a model where households differ with respect to their endowments with the immobile factor land. Local governments decide about the level of productive infrastructure in their jurisdiction. According to their land endowments, different households benefit to a different degree from infrastructure. This redistribution effect of local infrastructure gives households an incentive for rent-seeking. As this paper shows, capital mobility and fiscal competition between local governments have an influence on the equilibrium level of rent-seeking. Rent-seeking expenditures increase with the introduction of capital mobility in a broad class of cases. (C) 2001 Elsevier Science B.V. All rights reserved.