Development strategies for tourism destinations: tourism

sophistication vs. resource investments

Rainer Andergassen

, Guido Candela
November 9, 2012
Department of Economics, University of Bologna, Piazza Scaravilli 2, 40126, Bologna, Italy
Abstract
This paper investigates the eectiveness of development strategies for tourism destinations.
We argue that resource investments unambiguously increase tourism revenues and that increas-
ing the degree of tourism sophistication, that is increasing the variety of tourism related goods
and services, increases tourism activity and decreases the perceived quality of the destinations
resource endowment, leading to an ambiguous eect on tourism revenues. We disentangle these
two eects and characterize situations where increasing the degree of tourism sophistication is a
viable development strategy and where it is impracticable and describe the optimal policy mix.
Keywords: Tourism destination; tourism sophistication; resource investments; tourism de-
mand; development strategy.
JEL: L83; O1; D11.

We would like to thank two anonymous referees for their comments and suggestions.

Corresponding author. Tel. +390512098666. E-mail addresses: rainer.andergassen@unibo.it,

guido.candela@unibo.it
1
1 Introduction
Considering the worldwide distribution of tourism activity we observe regions with highly developed
destinations and regions where tourism is still absent. Policy makers in these latter areas, which
include many developing countries, view the promotion of tourism activity, with its inherently strong
forward and backward linkages, as a leading growth and development strategy (see, for example,
UNCTAD, 2007; Lee and Chang, 2008; Sequeira and Nunes, 2008). This raises the policy issue of
identifying features that allow for a successful tourism take-o and of nding instruments apt to foster
the transformation of a region into a ourishing tourism destination. Given the regions cultural and
natural resource endowments and given the variety of goods and services oered to actual or potential
tourists, the policy makers problem is how to promote tourism activity.
To address this question we investigate the characteristics of tourism demand and revenues in
a destination, identify two policy instruments and analyze the policy makers optimal development
strategy. In our model tourists are attracted by the presence of natural and/or cultural resources (see,
for example, Melian-Gonzalez and Garcia-Falcon, 2003; Papatheodorou, 2003; Correani and Garofalo,
2010) and exhibit love of variety preferences for tourism related goods and services, such as restaurants,
recreational facilities and so on. It is this novel feature that allows us to show that overnight stays,
which are a proxy for tourism activity, depend positively on the degree of dierentiation of tourism
related goods and on the destinations resource endowment. In other words, the destinations capability
to attract tourists depends positively on the variety of tourism related goods and services and on the
cultural and/or natural resource endowment. This result is in keeping with the conceptual model
of destination competitiveness developed in Ritchie and Crouch (2003), in which it is argued that
among the most important factor are physiography, culture, mix of tourist activities, special events and
entertainment. From the policy viewpoint this opens the possibility of furthering tourism development,
measured in terms of tourism revenues
1
, either by increasing the variety of tourism related goods and
services, that is, by increasing the degree of sophistication of the tourism product or by enriching
the destinations resource endowment. Examples of this latter policy option are investments aimed at
reclaiming or creating articial beaches, the production of articial snow or the creation of new ski
1
Candela and Figini (forthcoming, ch. 3.4) argue that the policy makers aim is to maximize tourism expenditures
instead of prots because ... the destination does not have the same decision power of an individual rm ... and ...
even if the destination had such power, the computation skills needed to gather and elaborate data on the production
costs of hundred of individual productive units would simply not be available in most cases.
2
slopes or ski runs
2
, or increasing the opening hours of museums
3
. We investigate the trade-o between
these two policy options and argue that while resource investments unambiguously increase tourism
revenues, increasing the degree of tourism sophistication has potentially an ambiguous eect on tourism
revenues. On the one hand tourism sophistication aects revenues positively by increasing tourism
activity (that is, overnight stays); on the other hand it may aect revenues negatively by decreasing
tourism quality because of resource congestion issues. In particular, an increase in tourism activity
may lead to an over-utilization of available cultural or natural resources, leading to a lower perceived
quality and to lower tourism expenditures. We disentangle these two eects and describe situations
where the former eect dominates the latter one, so that increasing the degree of sophistication is
a viable development strategy. In particular, we show that if the perceived tourism quality strongly
reacts to changes in tourism activity, then furthering the degree of sophistication may reduce tourism
revenues
4
.
We characterize in a static model the policy trade-o between sophistication and resource invest-
ments and describe the optimal policy mix, that is, the optimal investment strategy for a policy maker
who aims at developing a thriving tourism destination. In particular, by introducing costs to the
policy maker to enrich the destinations resource endowment and costs of increasing the degree of
tourism product sophistication we describe the optimal policy intervention. We show that in general
the optimal strategy consists of a mix of both policies, where the solution to the trade-o depends
on the size of marginal costs and marginal benets (that is, marginal increase in tourism revenues).
The analysis also shows that if the perceived tourism quality strongly reacts to increases in tourism
activity, then the policy maker should invest relatively more in resources; in the extreme case where
this reaction is very strong, a corner solution may be optimal where increasing the degree of sophisti-
cation of the tourism product is not desirable. Finally we highlight situations where tourism take-o
may be unfeasible. This discussion is closely aligned with recent contributions on sustainable tourism
2
The tourism industry is becoming more and more technological, since todays technologies allow destinations to
expand and enrich their natural resource endowments (see, for example, Bruinsma et. al, 2010; Candela and Figini,
forthcoming).
3
In a similar vein, Stabler et. al (2010) base their analysis on the distinction between natural attractions and build
ones, that is, human made.
4
For instance, consider the case of a policy maker trying to promote tourism activity in a destination whose main
tourism attraction is a beautiful small beach that is greatly appreciated by the few tourists (i.e. high perceived tourism
quality). Suppose that by increasing the variety of tourism products and services oered, for example, by creating new
attractions, such as a shopping mall, the policy maker succeeds in increasing tourism activity. This may lead to an
overcrowding of the primary tourism attraction, the small beautiful beach, which now may no longer be perceived by
tourists as beautiful. In other words, the sophistication strategy reduces the perceived quality of the tourism product.
If this reduction is suciently strong, then it leads to a reduction in overall tourism expenditures and the destinations
tourism revenues, while if this reduction is suciently weak, then it leads to an increase in tourism revenues. Thus, what
matters is how strongly the perceived tourism quality decreases as tourism activity increases.
3
and sustainable tourism development, in which growth and development of destinations are related
to the long-term survival of tourism (see for example Sharpley and Telfer, 2002; Butler, 2005; and
for a survey see Stabler et. al, 2010). Our contribution formalizes the relationship between tourism
take-o, or long-term survival of the destination, and resource investments, that is, the sustainability
of the destination, by showing that if development through tourism sophistication is not viable, then
resource endowments pose a binding constraint on tourism take-o and hence resource investments are
necessary.
The remaining part of the paper is organized as follows. In Section 2 we present the formal model
and the main results. Section 3 contains some concluding remarks and all proofs are listed in the
Appendix.
2 The model
We consider a continuum of measure one of identical individuals, each endowed with a constant elastic-
ity of substitution (CES) utility function exhibiting Dixit and Stiglitz (1977) love of variety preferences
for dierentiated tourism related goods. The utility function of the representative consumer j is
U (y (j) , h(j) , x
1
(j) , ..., x
i
(j) , ..., x
n
(j)) =
_
y (j)

+z

_
h(j)

+
_

n
i=1
x
i
(j)

_
1

(1)
where y is a composite non-touristic good
5
, h are overnight stays and x
i
, for i = 1, ..., n, represent
dierentiated tourism related goods. We call T the tourism product, consisting of overnight stays (h)
and dierentiated tourism related products ({x
i
}
n
i=1
), i.e. T = (h, {x
i
}
n
i=1
). z indicates the perceived
quality of the destinations resource endowment, such as beaches, mountains, museums or more in
general heritages, on which tourism is based. In particular, the greater z is, the greater the relative
importance of the tourism product in utility terms
6
. We assume that at least one variety has to be
oered such that tourism is viable, i.e. n 1; in other words, for n = 0, total overnight stays are nil.
n is the degree of tourism product diversication and we consider it to be a proxy for the degree of
tourism sophistication
7
. We neglect for simplicity the index j wherever this does not lead to confusion.
5
y could also include tourism consumption related to other destinations.
6
Let us rewrite the utility function as follows U

y,

T

+z

T

, where

T is the sub-utility of the tourism
product, then the marginal rate of substitution between y and

T is
dy
d

T
=
Uy
U

T
=
1
z

T
y

1
and thus the greater z
is, the lower

dy
d

, that is, the greater the relative importance of the tourism product in utility terms.
7
See also Andergassen and Candela (2009).
4
Throughout the paper we assume the following.
Assumption 1 (i) 0 < < 1, (ii) < < 0, (iii) 0 < < 1.
Assumption 1 (i) implies that the non-touristic good y and the tourism product T are gross sub-
stitutes; for 1 they are perfect substitutes. Assumption 1 (ii) implies that overnight stays and
tourism related products are gross complements, where for they are perfect complements.
Assumption 1 (iii) implies that goods/services x
i
, i = 1,...,n, are gross substitutes.
The representative consumer faces the budget constraint
y +p
h
h +

n
i=1
p
i
x
i
= I (2)
where I is his income, p
h
is the price of a single overnight stay and p
i
the price of x
i
; the price of the
non-touristic good y has been normalized to 1. Note that tourism implies by denition a movement
of persons in space and time and thus the tourists income (I) in the present partial equilibrium
framework is generated in regions other than the destination considered. As a consequence, we treat I
as an exogenous variable. Moreover, this denition implies that tourism expenditures and the residents
income from tourism activity do not lead to further tourism activity in the destination
8
.
We dene

1
(0, ),

1
(1, 0),

(0, ). Let H =

1
0
h(j) dj be
aggregate overnight stays, X
i
=

1
0
x
i
(j) dj aggregate consumption of each dierentiated good/service
and Y =

1
0
y (j) dj aggregate consumption of non-touristic goods.
9
We assume that tourism is based on natural and/or cultural resources. Let R be a measure of the
destinations natural and/or cultural resource endowment, such as beaches or mountains, museums or
shrines. We treat R as an exogenous variable, but assume that tourism activity aects the perceived
quality of these resources. In particular, we assume that for a given resource endowment, an increase
in tourism activity reduces the perceived quality of the destinations resource endowment (z) because
of congestion problems (i.e. common pool resources). On the other hand, we assume that the policy
maker can undertake investments that enrich the destinations resource endowment. Therefore, we
conjecture that z depends negatively on total overnight stays (H), which is a proxy for the size of the
tourism activity, and positively on the destinations resource endowment (R). Let
z
H
=
z
H
z
H < 0
be the elasticity of z with respect to H, a measure for the degree of quality depreciation as tourism
8
For a discussion of the denition and its implication see Candela and Figini (forthcoming, ch 1).
9
Note that the assumption of a unit measure of individuals is without loss of generality since a change in the measure
of individuals can always be interpreted as a change in the income of individuals.
5
activity increases.
Assumption 2 z = z (H, R), where (i) z
H
< 0, z
HH
< 0; (ii) z
R
> 0 and z
RR
0; (iii) z
HR
0.
z
H
is the degree of quality depreciation as a consequence of tourism activity and (i) states that the
depreciation becomes stronger the stronger tourism activity is. z
R
is the degree of quality appreciation
as a consequence of an increase in the destinations resource endowment where we assume that there are
decreasing returns to scale to investments aimed at increasing R; (iii) implies that resource investments
mitigate congestion issues.
Consider next the supply side. We assume that the degree of sophistication of the tourism product
is centrally devised, that is, the policy maker decides the type and how many tourism related goods
and services are oered in the destination, that the unit production costs of dierentiated tourism
goods and services x
i
is c for each i = 1, ..., n and that they are supplied in a perfectly competitive
way
10
. Consequently, at the equilibrium, we have that p
i
= p = c for each i = 1, ..., n. We assume
that the aggregate supply function for overnight stays is p
h
= S (H), with > S
H
0, where S
H
> 0
represents the case in which there are decreasing returns to scale due to, for example, environmental
constraints, while S
H
= 0 represents the case in which such constraints are not binding and overnight
stays are in perfectly elastic supply
11
. Let
S
H
=
S
H
S
H be the elasticity of S with respect to H and
we assume that
S
H
is non-increasing in H.
We characterize total tourism revenues as n and R vary.
The destinations tourism revenue is dened as
(n, R) = p
h
H +p
n

i=1
X
i
where p
h
= S (H) and p = c. Since the representative consumers income I is constant and because of
the aggregate budget constraint, characterizing implies characterizing I Y .
Before analyzing the eect of n and R on we show that the aggregate demand of overnight stays
H

is an increasing function of resource endowment (R) and the degree of tourism sophistication (n).
10
One could assume that there exists a product/rm set-up cost, and determine n through an entry and exit decision of
rms, by assuming that rms have some market power (e.g. monopolistic competition). The policy variable in this case
would be the size of these entry costs (e.g. the policy maker can subsidize the entry cost). This would greatly complicate
the exposition and the solution of the model, but without aecting the qualitative results. Thus, for simplicitys sake
we consider n to be the policy variable. One way to interpret our assumption is that there exist product/rm set-up
costs, but these are fully subsidized by the policy maker, and that competition among rms to serve the market drives
the price down to marginal costs. If the policy maker wants to increase n he simply subsidizes an additional market; if
he wants to reduce n, he increases the entry costs such that no rm is interested in serving the market.
11
One possible microfoundation of this supply function is to assume that rm costs for overnight stays H are (H),
with

(H) > 0,

(H) 0, and where

(H) > 0 represents the case of increasing marginal costs due to environmental
constraints, and that rms behave in a perfectly competitive way.
6
Lemma 1 (i) H

is increasing in R; (ii) H

is increasing in n; (iii) the larger |

z
H
| or S
H
is, the
lower
H

R
and
H

n
.
An increase in the destinations resource endowments increases the perceived tourism quality (z)
and hence increases overnight stays. The stronger the negative feedbacks through price increases (if
the supply of overnight stays is not perfectly elastic) and congestions issues (a decrease in z due
to the increase in overnight stays) are, the smaller the increase in overnight stays. Because of the
complementarity assumption between overnight stays and tourism related goods, an increase in n
increases overnight stays. The intuition for this result is that the more tourism related goods and
services are available, the more time tourists spend in a given destination. The greater |
z
H
| or S
H
is,
the lower the positive impact of tourism sophistication and resource investments on tourism activity.
Proposition 1 is increasing in R.
Increasing the destinations resource endowment increases consumer demand and expenditure for
overnight stays and for tourism related goods and services, thereby increasing tourism revenues.
We dene M
z
H

S
H
(1 +

).
Lemma 2 is decreasing in the degree of tourism sophistication (n) if M > 1, while they are in-
creasing if M < 1.
Tourism revenues are decreasing or increasing in the degree of product diversication, depending
on the degree of complementarity between overnight stays and tourism goods/services (

), on the
degree of quality depreciation as tourism activity increases (
z
H
) and on the elasticity of the supply
function (
S
H
). To better understand this result, consider rst the case in which the supply of overnight
stays is perfectly elastic (that is, S
H
= 0). In this case, result is driven by the interplay between two
opposing forces: a love of variety eect which positively aects tourism expenditures and a quality
depreciation eect, which negatively aects tourism revenues. If the complementarity between tourism
goods and overnight stays is weak, that is if n weakly aects H

, or if z does not strongly react to

changes in H, then the relationship between n and z is weak. Consequently, the love of variety eect
is relatively stronger and thus n positively aects tourism revenues. In other words, because of the
increased variety of tourism related goods and services available, tourists stay longer in the destination
and overall spend more, thereby leading to greater tourism revenues. On the other hand, if they are
strong complements, that is, if an increase in n leads to a strong increase in H

, or if z strongly reacts
7
to changes in H, then an increase in n leads to a strong reduction of the perceived quality of tourism.
Consequently, the quality depreciation eect dominates, and thus the reduction in expenses on tourism
related goods and services is stronger than the increased expenditure on overnight stays and thus total
tourism revenues decrease as n increase
12
. In other words, tourists stay longer in the destination and
thus spend more for overnight stays, but because of the perceived poorer quality they spend less on
tourism related goods and services, which leads to lower total tourism revenues. Note that this eect
is stronger, the stronger the degree of complementarity (

) and/or the larger |z

H
|. If the supply
of overnight stays is not perfectly elastic (S
H
> 0), then the resulting price increase mitigates the
resource congestion eect produced by an increase in n. In other words, the greater
S
H
is, the weaker
the inuence of n on H

and thus on z.
Summing up, if quality depreciation is strong enough, consumers increase their expenditure on non-
touristic goods and reduce their expenses on tourism; a suciently strong price increase eliminates the
resource congestion eect, leading to a positive relationship between and n.
Let us dene

M lim
n
M. The following result holds.
Proposition 2 (i) If

M > 1, then there exists a n

where
n
0 for each n n

, where
n

R
0 if
M
R
0; (ii) if

M < 1 then
n
> 0 for each n.
If we consider n as a policy instrument for the development of a tourism destination, then n

is an upper limit for the usefulness of the instrument. The existence of n

depends on the degree

of resource depreciation; as stated in Proposition 2, a sucient condition for the existence of n

is
that lim
n
M > 1. Tourism sophistication leads to an increase in tourism activity (Lemma 1) and
therefore to a perceived quality depreciation of the destinations resource endowment. Since the quality
depreciation gets the stronger the greater the degree of tourism sophistication is (Assumption 2 (i)), it
may happen that, as the process of tourism sophistication proceeds, the degree of quality depreciation
becomes suciently strong such that a further increase in n leads to a reduction in tourism revenues.
In this case there exists a degree of tourism sophistication (n

) that, for a given resource endowment,

maximizes tourism revenues.
An increase in R has a twofold eect on n

. On the one hand, for given overnight stays, it increases

the perceived quality of the destinations resource endowments and thus increases n

, on the other
hand it increases overnight stays thereby increasing congestion issues and thus decreasing tourism
quality, which decreases n

. For M
R
> 0 the latter eect dominates and thus resource investments
12
Note also that since H

is always increasing in n, it is

n
i=1
X

i
that is decreasing in n for M > 1.
8
instead of alleviating worsen congestion issues, while for M
R
< 0 the former eect dominates and thus
resource investments weaken the constraints posed by congestion issues.
13
If the degree of quality depreciation remains small as tourism activity increases, then tourism
sophistication always increases tourism revenues.
We treat the two cases in a unied way considering n

< if

M > 1 and n

= if

M < 1. If we
consider R and n as two policy instruments (Proposition 1 and Proposition 2, respectively), then the
following Corollary describes the policy trade-o.
Corollary 1 Let MRS
n,R

R
n
denote the marginal rate of substitution between n and R. MRS
n,R
is negative for each n < n

and is positive for each n > n

.
As long as MRS
n,R
is negative, the policy maker can use both instruments to promote tourism
development and the optimal policy mix depends on the relative costs and benets of doing so. But
once n > n

tourism development via sophistication is no longer viable. Note that if n

= , then
sophistication is always a viable development strategy.
Let us assume that the policy maker can aect the degree of tourism product sophistication and
enrich the destinations resource endowment at some costs. In particular, let K
R
(R R)+K
n
(n n)
be the social opportunity cost of increasing resource endowments by R = R R and the degree of
tourism product sophistication by n = n n, where R and n are the initial levels of R and n,
respectively. K
R
> 0 is the constant marginal social (opportunity) cost of enriching the destinations
resource endowment and that K
n
> 0 is the constant social marginal (opportunity) cost of increasing
the degree of tourism sophistication. Assume also that the policy maker faces the budget constraint
K
R
(R R)+K
n
(n n) K. Let MRTS
n,R

K
R
Kn
be the marginal rate of technical substitution,
that is, the relative social marginal cost of increasing R and n
14
. We characterize the optimal static
policy mix if the aim is to maximize overall tourism revenues minus the cost of the policy intervention,
13
Using the implicit function theorem one obtains that
dn

dR
=
M
R
Mn
, where Mn > 0, and
M
R
=

z
HR
H

z
z
H
z
R
H

z
2

z
HH
H

z
z
2
H
H

z
2
+z
H
1
z

(1 +)

S
H
H

R
where the rst term is negative while the second one is positive, since
S
H
is by assumption non-increasing in H and H

R
is positive.
14
Social costs of increasing n could, for example, be the social costs incurred by the policy maker in subsidizing rms
entry costs, while those of increasing R could be due to resources spent in reclaiming and creating articial beaches, or
creating new ski slopes.
9
subject to the budget constraint:
max
R,n
{(n, R) K (R R, n n)}
s.t. K
R
(R R) +K
n
(n n) K
We simplify the analysis and assume that the supply of overnight stays is perfectly elastic and that
resource investments alleviate congestion issues
15
.
Proposition 3 If
S
H
= 0 and M
R
< 0, then the optimal policy mix solves the problem |MRS
n,R
| =
|MRTS
n,R
|.
Proposition 3 describes the optimal policy mix. Since |MRS
n,R
| and |MRTS
n,R
| are relative
marginal gains and relative marginal costs of resource investments, respectively, the policy maker has to
choose n and R such that the condition |MRS
n,R
| = |MRTS
n,R
| is satised. Thus, in general it is
optimal to increase both n and R. Note that the larger M is, that is, the stronger the perceived quality
depreciation as tourism activity increases, the lower marginal gains from a sophistication strategy and
hence the more the policy maker should invest in resources. Moreover, if M is suciently large
(in particular, if M > 1), then a corner solution may be optimal and thus the enrichment of the
destinations resource endowment is the unique optimal development strategy.
A nal issue concerns the viability of a tourism industry. For a given resource endowment,
|
n=n
is the maximum of revenues achievable through tourism sophistication. If is too low to
guarantee tourism take-o, then resource endowments pose a binding constraint to the development
process and hence resource investments are necessary
16
.
3 Conclusion
The main problem for policy makers of destinations is how to foster or how to kick-o the develop-
ment of a tourism industry. We investigated the eectiveness of tourism sophistication and resource
investments as development strategies. We showed that the success of fostering tourism development
through tourism sophistication may be constrained by the destinations resource endowment. Tourism
sophistication increases tourism activity, thereby aecting positively tourism revenues, but aggravating
15
Using a continuity argument, the result holds also for small values of
S
H
. On the other hand, for
S
H
suciently
large, monotonicity of

MRS
n,R

, and consequently the uniqueness of the optimal policy mix, is no longer guaranteed.
16
Suppose that n

< in which case < , then taking the total derivate of with respect to R we obtain, using
the envelope theorem,
d
dR
=

R
> 0.
10
resource congestion issues. In particular, we argued that if the perceived quality depreciation of the
destinations resource endowment as a consequence of tourism activity is strong enough, then engaging
in a sophistication strategy may well reduce tourism revenues, obstructing the kick-o of the tourism
industry. To overcome this hurdle, our analysis suggests that policy makers should engage in invest-
ments aimed at enriching the destinations natural and/or cultural resource endowment since they
positively aect tourism demand and revenues. Those regions where these investments are not feasible
or too costly cannot become tourism destinations since the perceived quality of such destinations is
too low to generate sustained revenues.
A limitation of the present model is the partial equilibrium framework. It would be interesting
to extend the model to a general equilibrium framework, where two or more economic regions are
considered and where tourists income is endogenously determined. In this framework one could also
analyze competition between tourism destinations and how it aects regional development strategies.
Tourism activity in a given destination, by increasing the income of its residents, would lead in this
case to tourism activity in the other destination, leading to interesting feedbacks that policy makers
should take into account. We leave these open issues for a possible future research.
Appendix
Proof of Lemma 1. We rst calculate individual demand functions, and then aggregate over individ-
uals. Since there is a continuum of consumers, each one has a negligible eect on the perceived tourism
quality z. Using Lagrange for solving the problem of maximizing (1) under the budget constraint (2),
the rst order conditions for the representative consumer read:
_
y

+z

_
h

+
_

n
i=1
x

i
_

_
1

1
y
1
= (3)
_
y

+z

_
h

+
_

n
i=1
x

i
_

_
1

1
z

_
h

+
_

n
i=1
x

i
_

1
h
1
= p
h
(4)
_
y

+z

_
h

+
_

n
i=1
x

i
_

_
1

1
z

_
h

+
_

n
i=1
x

i
_

1 _

n
i=1
x

i
_

1
x
1
i
= p
i
,
(5)
11
for i = 1, ..., n, where is the Lagrange multiplier. Using the assumption that all rms producing
tourism related goods are symmetric we have p
i
= p and hence obtain x
i
= x, for each i = 1, ..., n.
From (4) and (5) we obtain
x = h
_
p
p
h
n
1

_ 1
1
(6)
while from (4) and (3) we obtain p
h
=
z

+n

1
h
1
y
1
which, using (6), reads as
y = h(p
h
)
1
1
z

1
_
1 +n

1
1

_
p
p
h
_

1
_
(

1)
1
1
(7)
Finally, we calculate h substituting (6) and (7) into the budget constraint (2) and obtain
h(n, z) =
I
p
h
_
1 +n

_
p
p
h
_

_
_
_
_
1 +p

h
z

_
1 +n

_
p
p
h
_

_
_
_
(8)
where h
n
> 0. Substituting (8) back into (6) and (7) one obtains
x(n, z) =
I
p
_
n

_
p
p
h
_

+ 1
_
1
n +p

h
z

_
n

+n

_
p
p
h
_

(9)
and
y (n, z) = I
1
1 +p

h
z

_
1 +n

_
p
p
h
_

. (10)
Since all individuals are identical, h(j) = h and x(j) = x, and consequently H = h and since
p
i
= p = c it follows that X
i
= X = x. Next we calculate the aggregate demand function H (n, R),
where the consumers choice H feeds back into the perceived tourism quality z. Using (8), we have to
solve the following xed point problem:
H = f (p
h
, n, z (H, R))
I
p
h
_
1 +n

_
p
p
h
_

_
_
_
_
1 +p

h
z

_
1 +n

_
p
p
h
_

_
_
_
(11)
which yields the solution

H = H (n, R). In view of Assumption 2, f
H
_
p
h
, n, z
_

H, R
__
0, with
12
f (p
h
, n, z (0, R)) > 0 and a unique H

solving f
_
p
h
, n, z
_

H, R
__
=

H exists, and thus the aggregate
demand function for overnight stays can be written as p
h
= D(H, n, R). Using the implicit function
theorem one obtains that
p
h
H
=
1f
H
fp
h
,
p
h
n
=
fn
fp
h
and
p
h
R
=
f
R
fp
h
, where f
p
h
< 0, f
H
0, f
n
> 0
and f
R
> 0 and thus D
H
< 0, D
R
> 0 and D
n
> 0.
Equating demand and supply, equilibrium overnight stays H

are implicitly dened by S (H) =

D(H, n, R). Applying the implicit function theorem one obtains that
H

n
=
Dn
S
H
D
H
> 0 and
H

R
=
D
R
S
H
D
H
> 0, or equivalently
H

n
=
fn
S
H
fp
h
(1f
H
)
> 0 and
H

R
=
f
R
S
H
fp
h
(1f
H
)
> 0, respectively.
After rearranging terms one obtains
H

n
=
H
2 p
h
I

n
1
_
p
p
h
_

_
_
_
1 +p

h
z

_
1

_
_
1 +n

_
p
p
h
_

_
_
_
S
H
f
p
h
+ 1 H

p
h
I

h
z

_
1 +n

_
p
p
h
_

_
1

z
H
> 0
(12)
and
H

R
=
H
2 p
h
I
_
1 +n

_
p
p
h
_

_
p

z
R
z
_
1 +n

_
p
p
h
_

S
H
f
p
h
+ 1 H

p
h
I

h
z

_
1 +n

_
p
p
h
_

_
1

z
H
(13)
where
f
p
h
=
H
2
I
_

_
_
1 +

+ (1 +

) n

_
p
p
h
_

_
_

_
1 +p

h
z

_
1 +n

_
p
p
h
_

_
(14)
Using (9) and (10), one obtains that X (n, R) = x(n, z (H

, R)) and Y (n, R) = y (n, z (H

, R)).
Comparative statics results directly follow from (12).
Proof of Proposition 1. From the aggregate budget constraint one obtains that = I Y .
Consequently, substituting (10) into the expression = I Y , nding the common denominator and
dividing the numerator and the denominator by p

h
z

_
1 +n

_
p
p
h
_

one obtains
(n, R) =
I
1 +p

h
z (H

, R)

_
1 +n

_
p
p
h
_

(15)
13
The derivative of with respect to R reads

R
=

2
I

h
z

_
1 +n

_
p
p
h
_

1
_
1
p
h
p
h
R

_
z
R
z
+
z
H
z
H

R
_
_
1 +n

_
p
p
h
_

__
Since
p
h
R
= S
H
H

R
and using 13 we can rewrite this expression as follows

R
=

2
I

h
z

1+n

p
p
h

S
H
fp
h
+1H

p
h
I

h
z

1+n

p
p
h

z
H
z
R
z

_
_
_
S
H
H
2 1
I
p

_
1 +n

_
p
p
h
_

(1 S
H
f
p
h
)
_
_
_
Using (14) and rearranging terms we obtain

R
=

2
I

h
z

1+n

p
p
h

S
H
fp
h
+1H

p
h
I

h
z

1+n

p
p
h

z
H
z
R
z

_
_
_
S
H
H
2
I
_
1 + (1 +

) n

_
p
p
h
_

_
_
_
_
1 +p

h
z

_
1 +n

_
p
p
h
_

_
_
_
+ 1
_
_
_
Using the denition of
S
H
, the denition of and taking into account that p
h
= S (H) and that
p
h
H

=
1
_
1 +n

_
p
p
h
_

_ (16)
we obtain

R
=

2
I

h
z

_
1 +n

_
p
p
h
_

S
H
f
p
h
+ 1 H

p
h
I

h
z

_
1 +n

_
p
p
h
_

_
1

z
H
z
R
z
_

S
H
1 + (1 +

) n

_
p
p
h
_

1 +n

_
p
p
h
_

+ 1
_

_
(17)
which is always positive.
14
Proof of Lemma 2. The derivative of the denominator of with respect to n is
p

z
H
z
H

n
_
1 +n

_
p
p
h
_

+
+p

h
z

_
_
1 +n

_
p
p
h
_

n
1
_
p
p
h
_

h
1
p
h
p
h
n
z

_
1 +n

_
p
p
h
_

1
where
p
h
n
= S
H
H

n
. After substituting the expression for
H

n
in the rst line of the derivative and
rearranging terms we obtain

h
z

_
1 +n

_
p
p
h
_

n
1
_
p
p
h
_

H
p
h
I

z
H

1+n

p
p
h

1+p

h
z

1+n

p
p
h

S
H
fp
h
+1
S
H
fp
h
+1H

p
h
I

h
z

1+n

p
p
h

z
H
+
+

h
1
p
h
S
H
H

n
z

_
1 +n

_
p
p
h
_

1
Using the equilibrium expression for H

(11) the derivative of with respect to n can be written as

n
(R, n) =

2
I

h
z

_
1 +n

_
p
p
h
_

n
1
_
p
p
h
_

S
H
f
p
h
+ 1 H

p
h
I

h
z

_
1 +n

_
p
p
h
_

_
1

z
H
(
z
H

1 +S
H
f
p
h
) +
1
p
h
S
H
H
n
_

_
Substituting the expression for
H

n
we obtain

n
(R, n) =

2
I

h
z

_
1 +n

_
p
p
h
_

1
n
1

p
p
h

S
H
fp
h
+1H

p
h
I

h
z

1+n

p
p
h

z
H

_
(
z
H

1 +S
H
f
p
h
) +
1
p
h
S
H
H

)
1+p

h
z

1+n

p
p
h

1+n

p
p
h

1+p

h
z

1+n

p
p
h

_
15
Using the equilibrium expression for H

(11) can be written as

n
(R, n) =

2
I

h
z

_
1 +n

_
p
p
h
_

1
n
1

p
p
h

S
H
fp
h
+1H

p
h
I

h
z

1+n

p
p
h

z
H

_
_
_
(
z
H

1 +S
H
f
p
h
) +S
H
(

)
H
2
I
_
_
_
1 +p

h
z

_
1

_
_
1 +n

_
p
p
h
_

_
_
_
_
_
_
We next focus on the second line of this expression, which, after substituting the expression for f
p
h
(14), reads

z
H

1 S
H
H
2
I
_
_
_
_
1 +

+ (1 +

) n

_
p
p
h
_

_
_
_
_
1 +p

h
z

_
1 +n

_
p
p
h
_

_
_
_

_
_
_
+S
H
H
2
I
_
_
_

+ (

) p

h
z

_
1 +n

_
p
p
h
_

_
_
_
Simplifying this expression one obtains

z
H

1 S
H
H
2
I
_
1 + (1 +

) n

_
p
p
h
_

_
_
_
_
1 +p

h
z

_
1 +n

_
p
p
h
_

_
_
_

S
H
H
2
I
_
_
_
1 +p

h
z

_
1 +n

_
p
p
h
_

_
_
_
or

z
H

1 S
H
H
2
I
(1 +

)
_
1 +n

_
p
p
h
_

_
_

_
1 +p

h
z

_
1 +n

_
p
p
h
_

_
Using the expression for and
S
H
we can write and taking into account (16) one obtain the nal
expression for
n

n
=

2
I

h
z

_
1 +n

_
p
p
h
_

1
n
1

p
p
h

S
H
fp
h
+1H

p
h
I

h
z

1+n

p
p
h

z
H

z
H

1
S
H
(1 +

)
_
(18)
and hence the result in the lemma follows.
16
Proof of Proposition 2. Taking the derivative of M (n) with respect to n we obtain
M
n
= H

n
__
z
HH
H

z
z
2
H
H

z
2
+z
H
1
z
_

(1 +

)
_
S
HH
S
2
H
H

S
2
+S
H
1
S
__
which, under Assumption 2 and the assumption that
S
H
is non-increasing in H is always positive.
Moreover, since for n = 0, H

= 0, if follows that
z
H
=
S
H
= 0 and thus M (0) = 0 < 1. Therefore, if

M > 1, then there exists a n

such that M (n) < 1, or

n
> 0, for n < n

, and M (n) > 1, or

n
< 0,
for n > n

. On the other hand, if

M < 1, then
n
> 0 for all values of n.
Proof of Corollary 1. The corollary is a direct consequence of Lemma 2, Proposition 1 and
Proposition 2.
Proof of Proposition 3. From the rst order conditions of the maximization problem one
obtains the the optimal (n, R) is given by the following condition MRS
n,R
= MRTS
n,R
. Using (17)
and (18), MRS
n,R
one obtains
MRS
n,R
=
z
R
z
n

S
H
_
1 + (1 +

) n

_
p
p
h
_

_
+ 1 +n

_
p
p
h
_

_
p
p
h
_
_
1 +
S
H
(1 +

)
z
H

_
and for
S
H
= 0 the expression becomes
MRS
n,R
=
z
R
z
n
1 +n

_
p
p
h
_

_
p
p
h
_

(1
z
H

)
If M
R
< 0, then |MRS
n,R
| is decreasing in R and increasing in n for each n < n

and decreasing in n
for each n

, while |MRTS
n,R
| is increasing in R and decreasing in n and consequently the result in
the proposition follows.
References
[1] Andergassen, R. - Candela G. (2009), Less Developed Countries, Tourism Investments
and Local Economic Development, WP n. 676, Department of Economics, University of
Bologna, 2009, http://www2.dse.unibo.it/wp/676.pdf .
17
[2] Bruinsma, F. - Kourtit K. - Nijkamp P. (2010), An Agent-Based Decision Support Model
for the Development of E-Services in the Tourist Sector, Review of Economic Analysis,
2, 232 - 255.
[3] Butler, R.W. (2005), Developing the Destinations: Diculties in Achieving Sustainability,
In Alejziak W. and Winiarski R. (eds), Tourism in Scientic Research, Krakow, University
of Information Technology and Management, Rzeszow, 33-46.
[4] Candela, G. - Figini P. (Forthcoming). Economics of Tourism Destinations. Springer
Verlag, Berlin.
[5] Correani, L. - Garofalo G. (2010), Chaotic Paths in the Tourism Industry, Economia
Politica, Journal of Analytical and Institutional Economics, 27, 103 - 146.
[6] Dixit, A. K. - Stiglitz J. E. (1977), Monopolistic Competition and Optimum Product
Diversity, American Economic Review, 67, 297-308.
[7] Lee, C.C. - Change C.P. (2008), Tourism Development and Economic Growth: A Closer
Look at Panels, Tourism Management, 29, 180 - 192.
[8] Melian-Gonzalez, A. - Garcia-Falcon, J. M. (2003), Competitive Potential of Tourism in
Destinations, Annals of Tourism Research, 30, 720-740.
[9] Papatheodorou, A. (2003), Modelling tourism development: a synthetic approach,
Tourism Economics, 9 , 407 - 430.
[10] Ritchie, J.R.B. - Crouch G.I. (2003), The Competitive Destination: A Sustainable Tourism
Perspective, Wallingford, CABI.
[11] Sequeira, T. N. - Nunes P.M. (2008), Does Tourism Inuence Economic Growth? A
Dynamic Panel Data Approach, Applied Economics, 40, 2431 - 2441.
[12] Sharpley, R. - Telfer D.J. (2002), Tourism and Development, Clevedon, Channel View.
[13] Stabler, M.J. - Papatheodorou A. - Sinclair M.T. (2010), The Economics of Tourism,
Second Edition, Routledge, London - New York.
[14] UNCTAD (2007), FDI in Tourism: The Development Dimension, United Nations, New
York and Geneva.
18