Commitment, Efficiency and Footloose Firms
The authors consider dynamic competition between a small number of local governments to attract a single large plant. The surplus available in each location is unknown when the initial location decision is made. Two cases are considered: if all agents can commit to second period actions and if they cannot. Without commitment, initially the firm will discriminate against the region with the lower set-up costs. If first-period productivity is low, the firm may relocate and receive an ex post subsidy from a second region. Commitment decreases the expected total surplus and, if fixed costs are small, favors the firm. Copyright 1992 by The London School of Economics and Political Science.
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