We set up a model of generalised oligopoly where two countries of different size compete for an exogenous, but variable, number of identical firms. The model combines a desire by national governments to attract internationally mobile firms with the existence of location rents that arise even in...

In a common market with costless mobility of all factors, regional governments can attract mobile firms by granting subsidies which must be financed out of wage taxes on mobile labour. Since firms locate where subsidies are highest and workers settle where taxes are lowest, government are forced...