Bidding for firms with unknown characteristics

Becker Johannes, Schneider Andrea


Zusammenfassung
When a region successfully attracts a firm by offering subsidies, the firm often commits itself to performance targets in terms of employment. In this paper, we interpret these firm‐specific targets as a consequence of incomplete information. We analyze a model of two regions that compete for a firm, assuming that the firm's productivity isex anteunknown. We show that performance targets often induce overemployment in high‐productivity firms, and that tax credits are often superior to lump‐sum payments. Moreover, when regions differ in wage rates, the low‐wage region wins the bid and has a higher surplus than under complete information. Finally, we show that, under incomplete information, bidding might not lead to efficient firm location.

Schlüsselwörter
Business taxation; incomplete information; mechanism design; state aids; subsidy competition



Publikationstyp
Aufsatz (Zeitschrift)

Begutachtet
Ja

Publikationsstatus
Veröffentlicht

Jahr
2019

Fachzeitschrift
Scandinavian Journal of Economics

Band
2019

Ausgabe
121(3)

Seiten
1222-1243

DOI