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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, 2015. "Unobservable investments, limited commitment, and the curse of firm relocation," BDPEMS Working Papers 1, Berlin School of Economics.
    • Handle: RePEc:bdp:wpaper:1
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    References listed on IDEAS

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    Cited by:

    1. 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).
    2. 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.
    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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