Asymmetric information and location

Abstract

In empirical location research, the probability of opening a new plant depends on the relative level of profit that can be gained based on the site’s attributes compared with all other alternatives. Many studies implicitly assume that the decision maker evaluates the potential profit with identical knowledge regarding the impact of each area’s attributes on the profit function. Such an approach disregards the problem of asymmetric information concerning the choices. An investor may have a strong incentive to locate the investment in the local environment because there is greater certainty (and lower information costs) regarding business conditions. In this paper, new evidence emerges concerning the connection between uncertainty and the location decision. Adding a variable to account for the investor’s local area of business significantly improves the regression results. The coefficients for explanatory variables change strikingly in some cases. The evidence suggests that urbanization economies and major (urban) market accessibility may play a discernible role in reducing uncertainty and associated information costs when investors locate outside their local area of business. Finally, the paper conjectures that the importance of the local area of business variable may reflect social capital networks and related informational advantages found in the entrepreneur’s home environment.