The comparative political economy of the location of industry

This paper studies location decisions of firms in an economic geography model with endogenous regional policy. Policy is determined by probabilistic voting under proportional and majoritarian elections. Different electoral competition give rise to different location incentives. Under plausible assumptions, the smaller region has a higher fraction of ideologically independent swing voters than the larger region. Majoritarian voting, by focusing electoral competition into swing districts containing the most policy‐responsive voters, therefore allocates more subsidies to firms in the smaller region. Compared to proportional voting, this leads to more firms in the region with fewer consumers. Proportional voting thus welfare‐dominates majoritarian election.