Andrea Schneider: Bidding for Firms with Unknown Characteristics
OFS seminar. Andrea Schneider is a researcher at OFS at the University of Oslo.
Andrea Schneider will present her paper «Bidding for Firms with Unknown Characteristics», written jointly with Johannes Becker.
When a region successfully attracts a firm by offering tax concessions, outright subsidies etc., the firm often commits itself to performance targets in terms of investment or employment. This paper interprets these firm-specific targets as a consequence of incomplete information. It analyzes a model of two regions which compete for a firm assuming that the firm's characteristics are ex-ante unknown. We consider direct mechanisms that induce truthful reporting of the firm's type. We find that, first, firm-specific performance targets are an equilibrium outcome if information is incomplete. Second, these performance targets often induce overemployment. Third, under incomplete information, low regional tax rates, wage rates, or unemployment benefits are a competitive advantage (which is not the case under complete information). Fourth, this competitive advantage not only implies that the more attractive region wins the bidding competition but also that this region may gain from the fact that information is incomplete, i.e. its payoff is greater than it would be under complete information.