Political participation, regional policy and the location of industry

This paper analyzes the location of manufacturing activities when regional policy is determined by each region's relative propensity to vote. The level of subsidies distributed to a region and the location of manufacturing activities are increasing in the region's relative political participation rate. The standard prediction in the economic geography literature, that the larger region becomes the core when trade barriers are reduced, no longer holds. The establishment of manufacturing production in the economically smaller region is increasing in the level of regional integration. As trade is increasingly liberalized, the economy features a reversed core-periphery equilibrium. Empirical evidence shows that the model is consistent with qualitative features of the data, and the results are robust to an instrumental variable strategy that accounts for the potential endogeneity of voter turnout.