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Partial ownership of local firms and zoning of neighboring towns

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Abstract

This paper investigates zoning in two neighboring towns in which firms are owned by investors that reside in the two towns. We find that local regulators use zoning strategically depending on the weight of local profits in social welfare. When they are high enough, both towns are zoned. For intermediate values an asymmetric result emerges: Only one regulator resorts to zoning despite the symmetry in the percentage of ownership of the neighboring firms. For a low weight of local profits, towns may or may not be zoned. Zoning restrictions on the location of firms are tighter when local profits are more significant for social welfare.

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Notes

  1. From the viewpoint of “fiscal zoning” local authorities may try to keep out relatively low-income residents, for example, by increasing the size of the minimum lot for building a single-family house or by reducing the number of apartments that can be built. A related branch of the literature on spatial models analyzes tax competition among perfectly competitive firms within local jurisdictions in metropolitan areas located on a line (see, for example, Braid 1993, 2000).

  2. The seminal work in analyzing the location of competing firms in linear cities is Hotelling (1929): Two firms simultaneously locate within a linear city and then simultaneously decide their prices. He assumes that consumers’ transportation costs are linear, which implies that there is no price equilibrium when firms locate close enough (see d’Aspremont et al. 1979). However, d’Aspremont et al. (1979) show that under quadratic transportation costs, the game has a price equilibrium for all locations of the firms.

  3. Bárcena-Ruiz and Casado-Izaga (2014) also analyze optimal zoning when two firms can price discriminate between consumers. Bárcena-Ruiz et al. (2014) study optimal zoning in a mixed duopoly framework. Matsumura and Matsushima (2012) show that restricting the locations of firms to the linear city reduces consumer welfare when firms sign strategic reward contracts with their managers. Hamoudi and Risueño (2012) study zoning in a circular city where firms and consumers are located on different sides. Suzuki (2013) analyzes the anticompetitive effect of land use regulations, since zoning may discourage entry.

  4. Examples of strategic behavior by local authorities can be found in the USA and in Europe (see Hanssen and Foslt 1998; Boarnet and Crane 1998; Heim 2012; Hrelja et al. 2012).

  5. Bárcena-Ruiz and Casado-Izaga (2017) point out that zoning costs are meaningful because “there are costs linked to studying regulation, to designing the maps that plot the different uses of different areas in the town, to uploading those maps and regulations to the Web site that offers the information; and there are costs for the staff who inform about and watch for non-fulfillment of the norms, to mention just a few.”

  6. Inoue et al. (2009) study the location of a public firm and a private firm in a city with two symmetric districts, each of which is run by a local government. However, they do not study zoning decisions.

  7. For example, Bárcena-Ruiz and Casado-Izaga (2016) show that the nationality of firms influences the design of the optimal zoning by a regulator in a duopoly model of spatial price discrimination. Matsushima and Matsumura (2006) analyze the spatial location of firms in a mixed oligopoly when there are foreign private firms, and Matsumura et al. (2009) investigate whether or not privatization is beneficial from the viewpoint of social welfare in a monopolistic competition model.

  8. Available at: http://www.bastianpr.com/wp-content/uploads/2014/07/Foreign-investment_-U.S.pdf.

  9. In Europe, French real estate investment trust Klépierre has recently acquired shopping malls in Spain and the Netherlands and owns shopping centers in 57 cities in 16 countries (http://www.klepierre.com/en/who-we-are/in-brief/).

  10. When the local firm belongs to local investors and a fixed cost of zoning exists, the model is the same as that analyzed by Bárcena-Ruiz and Casado-Izaga (2017) in the case of two towns of the same size.

  11. The second-order conditions of the problems that we analyze are always satisfied.

  12. The analysis that includes Eqs. (1)–(6) can be found in Anderson et al. (1992, Chapter 8, pp. 293–301).

  13. We have used Wolfram Mathematica for some of the calculations made in the paper. Detailed computations are available from the authors on request.

  14. For example, when \(\alpha =1\), we obtain that the optimal locations from a social welfare viewpoint are: \(x_{1}^{*}=5/16\); \(x_{2}^{*}=11/16\). For \(\alpha =3/4\): \(x_{1}^{*}=1/4\); \(x_{2}^{*}=3/4\). When \(\alpha =1/2\): \(x_{1}^{*}=1/8\); \(x_{2}^{*}=7/8\). Finally, when \(\alpha =1/4\) or 0: \(x_{1}^{*}=0\); \(x_{2}^{*}=1\), the same result is obtained by d’Aspremont et al. (1979) assuming a single linear city with \(\alpha =0\) and no zoning.

  15. This approach is valid as long as \(x_{2}=1\). When \(x_{2}\) depends on \(x_{1}\), this way of finding the solution is not valid as one has to proceed backwards.

  16. Comparing \(W_{1}^{ZN}\) and \(W_{2}^{ZN}\) for \(3/8<\alpha \le 0.4765\), we obtain that \(W_{1}^{ZN}\)\(<W_{2}^{ZN}\) because \(\delta >\gamma\).

  17. The situation is different if the metropolitan area extends over different countries. In that case, there is not a superior authority that can force local regulators to harmonize their rules across national borders.

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Acknowledgements

We thank two referees for helpful comments. Financial support from Ministerio de Ciencia y Tecnología (ECO2015-66803-P) and the University of the Basque Country UPV/EHU (GIU17/051) is gratefully acknowledged

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  1. Departamento de Fundamentos del Análisis Económico I., Universidad del País Vasco, UPV/EHU, Av. Lehendakari Agirre 83, 48015, Bilbao, Spain

    Juan Carlos Bárcena-Ruiz & F. Javier Casado-Izaga

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  1. Juan Carlos Bárcena-Ruiz
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  2. F. Javier Casado-Izaga
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Correspondence to Juan Carlos Bárcena-Ruiz.

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Bárcena-Ruiz, J.C., Casado-Izaga, F.J. Partial ownership of local firms and zoning of neighboring towns. Ann Reg Sci 65, 27–43 (2020). https://doi.org/10.1007/s00168-019-00972-5

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