Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103894
Authors: 
Pollrich, Martin
Schmidt, Robert C.
Year of Publication: 
2014
Series/Report no.: 
SFB/TR 15 Discussion Paper 480
Abstract: 
A unilateral policy intervention by a country (such as the introduction of an emission price) can induce firms to relocate to other countries. We analyze a dynamic game where a regulator offers contracts to avert relocation of a firm in each of two periods. The firm can undertake a location-specific investment (e.g., in abatement capital). Contracts can be written on some contractible productive activity (e.g., emissions), but the firm's investment is not contractible. A moral hazard problem arises under short-term contracting that makes it impossible to implement outcomes with positive transfers in the second period. The regulator resorts to high-powered incentives in the first period. The firm then overinvests and a lock-in effect prevents relocation in both periods. Paradoxically, the distortion in the firstperiod contract can be so severe that higher transfers are needed to avert relocation compared to a (hypothetical) situation without the investment opportunity.
Subjects: 
moral hazard
contract theory
limited commitment
firm mobility
abatement capital
JEL: 
D82
D86
L51
Q58
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
448.43 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.