COMMITMENT, EFFICIENCY AND FOOTLOOSE FIRMS

We 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, favours the firm.