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

Martin Pollrich and Robert Schmidt

No 1, BDPEMS Working Papers from Berlin School 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).

Keywords: moral hazard; contract theory; limited commitment; firrm mobility; abatement capital (search for similar items in EconPapers)
JEL-codes: D82 D86 L51 (search for similar items in EconPapers)
Date: 2015-09-25
New Economics Papers: this item is included in nep-bec, nep-mic and nep-reg
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Citations: View citations in EconPapers (3)

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