The Comparative Political Economy of Economic Geography

This paper examines how different electoral rules affect the lo- cation decisions of firms through the effect on regional policy. The equilibrium location of industry in the economically smaller (larger) region is higher under majoritarian (proportional) elections. The stan- dard prediction in the economic geography literature, that the larger region becomes the core when trade barriers are reduced, no longer holds. The establishment of manufacturing production in the smaller region is increasing in the level of regional integration. As trade is in- creasingly liberalized, the economy features a reversed core-periphery equilibrium. This result holds under both electoral rules. However, firms locate to the smaller region at a relatively higher rate in the case of majoritarian voting, hence, the reversed equilibrium occurs for a relatively lower level of regional integration with majoritarian elections. Empirical evidence shows that the model is consistent with qualitative features of the data, and the results are robust to an instru- mental variable strategy that accounts for the potential endogeneity of the electoral rule.