Cooperative approach to a location problem with agglomeration economies

Abstract

AbstractThis paper considers agglomeration economies. A new firm is planning to open a plant in a country divided into several regions. Each firm receives a positive externality if the new plant is located in its region. In a decentralized mechanism, the plant would be opened in the region where the new firm maximizes its individual benefit. Due to the externalities, it could be the case that the aggregate utility of all firms is maximized in a different region. Thus, the firms in the optimal region could transfer something to the new firm in order to incentivize it to open the plant in that region. We propose two rules that provide two different schemes for transfers between firms already located in the country and the newcomer. The first is based on cooperative game theory. This rule coincides with the $$\tau$$ τ -value, the nucleolus, and the per capita nucleolus of the associated cooperative game. The second is defined directly. We provide axiomatic characterizations for both rules. We characterize the core of the cooperative game. We prove that both rules belong to the core.