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Unobservable investments, limited commitment, and the curse of firm relocation

Author

Listed:
  • Martin Pollrich

    () (Humboldt-Universitaet zu Berlin, Department of Economics)

  • Robert Schmidt

    () (Humboldt-Universitaet zu Berlin, Department of Economics)

Abstract

Changes in market conditions or policies can induce firms to relocate. Countries may intervene by subsidizing domestic rms. We analyze a dynamic game where a regulator oers contracts to avert relocation of a rm in each of two periods. The firm can undertake an investment that is unobservable to the regulator, while contracts are contingent on an observable productive activity. Under limited commitment it is impossible to implement outcomes with positive transfers in the second period. To circumvent this problem, the regulator can tighten the regulation of the firm in the first period to induce a larger investment (lock-in effect).

Suggested Citation

  • Martin Pollrich & Robert Schmidt, 2014. "Unobservable investments, limited commitment, and the curse of firm relocation," Working Papers 2014004, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
  • Handle: RePEc:bdp:wpaper:1
    as

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    References listed on IDEAS

    as
    1. Rey, Patrick & Salanie, Bernard, 1990. "Long-term, Short-term and Renegotiation: On the Value of Commitment in Contracting," Econometrica, Econometric Society, vol. 58(3), pages 597-619, May.
    2. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
    3. Motta, Massimo & Thisse, Jacques-Francois, 1994. "Does environmental dumping lead to delocation?," European Economic Review, Elsevier, vol. 38(3-4), pages 563-576, April.
    4. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 173-191.
    5. Schmidt, Robert C. & Heitzig, Jobst, 2014. "Carbon leakage: Grandfathering as an incentive device to avert firm relocation," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 209-223.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Daniel Nachtigall, 2019. "Dynamic Climate Policy Under Firm Relocation: The Implications of Phasing Out Free Allowances," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 473-503, September.
    2. Daniel Nachtigall, 2016. "Climate policy under firm relocation: The implications of phasing out free allowances," Working Papers 2016007, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
    3. Nachtigall, Daniel, 2016. "Climate policy under firm relocation: The implications of phasing out free allowances," Discussion Papers 2016/25, Free University Berlin, School of Business & Economics.

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    More about this item

    Keywords

    moral hazard; contract theory; limited commitment; firrm mobility; abatement capital;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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