Regional investment under uncertain costs of location

Due to political and economic integration, firms face increasing opportunities for locating their activities in countries, regions and cities that provide the best business environment for their specific needs. In our study, we focus on the impact of economic risk and risk preferences upon regional...

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Bibliographic Details
Published in:The Annals of regional science 2013-12, Vol.51 (3), p.645-657
Main Authors: Broll, Udo, Roldán-Ponce, Antonio, Wahl, Jack E.
Format: Article
Language:English
Subjects:
Business
Business costs
Business cycles
Capital
Capital investments
Comparative analysis
Cost
Costs
Decision making
Economic activity
Economic development
Economics
Economics and Finance
Economies of scale
Elasticity
Empirical research
Environmental Economics
Expected utility
Financing
Geography
Investment
Investment analysis
Investments
Labor unions
Landscape/Regional and Urban Planning
Location
Microeconomics
Original Paper
Political economy
Position (location)
Regional
Regional economics
Regional/Spatial Science
Regionalism
Regions
Risk
Risk assessment
Risk aversion
Studies
Uncertainty
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Summary:Due to political and economic integration, firms face increasing opportunities for locating their activities in countries, regions and cities that provide the best business environment for their specific needs. In our study, we focus on the impact of economic risk and risk preferences upon regional allocation of capital investments. The source of risk stems from the difference in costs of location and the business cycle across regions. Firms are seeking ways to reduce their exposure of regional shocks. As a result, regional concentration of investment of capital is endogenous. A comparative static analysis shows that regional capital allocation depends upon the firm’s risk preferences. Our findings demonstrate the suitability of the two-moment approach with multiple risks as an alternative to the expected utility approach. The impact of changes in distribution parameters, such as the expected costs of location, the variance of costs of location and the correlation between locational costs (or the business cycle), can be fully characterized by the elasticity of risk aversion. Elements of risk preferences beyond risk aversion prove to be important to evaluate regional policies. This insight is of interest for empirical research in regional economics.
ISSN:0570-1864
1432-0592
DOI:10.1007/s00168-013-0561-5