District formation and local social capital: a (tacit) co-opetition approach

Abstract

This paper considers a model of district formation as a local socio-economic system incorporating the mix of local cooperation and competition, termed co-opetition. There are heterogeneous firms distinguished by their “stand-alone” district-dependent production and transportation cost. Every firm chooses its location when its production cost is affected by local socio-economic spillovers generated by other firms in the district. The firms take into account the reciprocal nature of local spillovers: while reducing their own costs, the firms also reduce the costs of their rivals. We show that the location game with a linear demand function yields an equilibrium for any number of firms and districts. We characterize both “agglomeration” equilibria, when all firms locate in one district, and “dispersed” equilibria, when firms locate in different districts. We demonstrate that a dispersed equilibrium can emerge only if firms' and districts' characteristics possess a sufficient degree of heterogeneity.