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Bidding for firms with unknown characteristics
University of Münster, Münster, Germany.
University of Münster, Münster, Germany.
2019 (English)In: Scandinavian Journal of Economics, ISSN 0347-0520, E-ISSN 1467-9442, Vol. 121, no 3, p. 1222-1243Article in journal (Refereed) Published
Abstract [en]

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 is ex ante unknown. 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. 

Place, publisher, year, edition, pages
John Wiley & Sons, 2019. Vol. 121, no 3, p. 1222-1243
Keywords [en]
Business taxation, incomplete information, mechanism design, state aids, subsidy competition, competition (economics), design, employment, industrial performance, productivity, state role, subsidy system, tax system, wage
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-46451DOI: 10.1111/sjoe.12309ISI: 000471704900013Scopus ID: 2-s2.0-85063468154OAI: oai:DiVA.org:hj-46451DiVA, id: diva2:1357487
Available from: 2019-10-04 Created: 2019-10-04 Last updated: 2019-10-04Bibliographically approved

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Schneider, Andrea

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