Regional Competition for the location of new facilities

A model of interregional competition for the location of new (production) facilities by a location decision maker (LDM) is analyzed as a differential game. Two regions try to enhance their attraction by making concessions to the LDM in order to raise the probability that a new facility will be located in a specific region, the benefit of which consists of the number of new jobs, new income etc. It is shown that the prospective benefits and costs of exerting influence are decisive for the final outcomes of the model. The open-loop Nash equilibrium solution -- which is also a degenerate feedback solution due to the simple structure of the model -- is likely to be inefficient in comparison with the cooperative solution of joint benefit maximization of both regions.