Optimal incentive contracts to avert firm relocation

Pollrich, Martin und Schmidt, Robert C. (16. September 2014): Optimal incentive contracts to avert firm relocation. SFB/TR 15 Discussion Paper No. 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.

• Dokumententyp: Paper
• Keywords: moral hazard; contract theory; limited commitment; firm mobility; abatement capital
• Fakultät: Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems ; Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A7 - Auktionen, Anreizprobleme und Wettbewerb
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: D82, D86, L51, Q58
• Sprache: Englisch