Bidding for firms with unknown characteristics

Becker Johannes, Schneider Andrea


Abstract
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.

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



Publication type
Article in Journal

Peer reviewed
Yes

Publication status
Published

Year
2019

Journal
Scandinavian Journal of Economics

Volume
2019

Issue
121(3)

Pages range
1222-1243

DOI