Imitation in location choice

The plan of this paper is as follows. Section 2 presents the model and main
theoretical results. Section 3 discusses these results in the context of three distinct
academic literatures. Section 4 returns to the problem of underutilized resources in
urban areas with a conclusion offering interpretations of the model as applied to the
case of urban ghettos in the U.S.

2 The Model

The model considers firms that have two primary choice variables: how much private
information to acquire about locations, and choice of location. Following exten-
sive theoretical (Prescott and Visscher, 1977; Kogut, 1983) and empirical literatures
(Chang, 1995; Chang and Rosenzweig 2001; Chung, 2001) on sequential entry and
exit, this model assumes that each firm makes the joint decision of information ac-
quisition and location choice at a single point in a longer sequence comprised of
similar joint decisions by other firms. To investigate the effect of a firm’s position
in this temporal sequence on information acquisition—in particular, the extent to
which firms condition their choices of location on previous movers’ locations instead
of collecting independent information on their own—all firms’ objective functions are
assumed to differ only in the sets of information available for conditioning expected
profit. Thus, heterogeneous values of maximized expected profit arise solely because
of heterogeneous positions in the sequence of moves and, consequently, the different
sets of information firms acquire.

To fix ideas, the simplest possible temporal sequence of decisions is considered:
two firms each of which chooses a quantity of information and location to maximize
expected profit. The first mover is referred to as Firm 1. The second mover is referred
to as Firm 2, and moves after observing Firm 1’s choice of location.

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