YARDSTICK COMPETITION



Yardstick Competition

Yardstick Competition

The present paper deals with one aspect that is particularly important in this respect: the incentives of office-motivated representatives to adopt innovations in the sense that the technology by which public goods and services are pro duced is significantly altered.

Ans. Consider a federation consisting of I jurisdictions. In each jurisdiction there are immobile and mobile households. Let A indicate the immobile type and B the mobile one. For simplicity, we normalize the number of type-A households in each jurisdiction i, i = 1 . . . . . I, to one. n ~ denotes the number of type-B households. N B is the exogenously given total number of identical mobile households in the federation. We characterize both 76 W.F. Richter, D. Wellisch / Journal of Public Economics 60 (1996) 73-93 U i (x i, zi) and household types by their utility functions, A A UB(x B~ , Zi), where x~ and x/B are the consumption levels of private goods and z~ denotes the local public good supply. We assume that there are no spillover effects in the provision of z i.

Each mobile household is endowed with one unit of labor which is inelasticaily supplied in its jurisdiction of residence. Immobile households are not endowed with labor. The costs of providing local public goods are given by Ci(zi, n~).a These costs are expressed in units of the private numeraire good and vary with the public good level and with the number of users. The specification is sufficiently flexible to allow for both increasing returns in the provision of

zi, C~ =- oci/ozi < C/zi,

and increasi B ing returns with respect to the number of users,

C i < C/n i

The local public good is said to be pure if there is no congestion, C, ~ = 0. However, some positive marginal congestion is the empirically more relevant case. 3 There are M identical mobile firms in the federation.

M is exogenous, which excludes the formation of new firms. We thus only model the locational choices of firms and not market entry, m~ is the number of mobile firms locating in jurisdiction i. Firms are said to be identical if they use the same technology, represented by the production function F(li, n i, &). Production makes use of three factors: l~ stands for the immobile factor land; n i for the mobile factor labor; and g, for the local public factor. Jurisdictions are endowed with a fixed amount of land, Li. We assume that there are no spillover effects in the use of the local public factor. The cost of providing the public factor are given by the function H~(gi, rn~).

These costs are also expressed in units of the private good and depend on the level of public inputs as well as on the number of firms locating in the jurisdiction. The special case of pure public inputs, HI,, =--OH~/Orn~ = 0, is included. In general, public factors will be impure, H~ > 0, ...