FIRM RELOCATION THREATS AND COPY CAT COSTS

To retain firms, states are forgiving billions of dollars in tax liabi lities. Some firms move even after a relief package is offered; other firms obtain tax concessions by bluffing. When firms threaten to reloc ate unless their current tax burden is lightened, what should a local government do? If it offers relief, at best it retains the firm, but i t also encourages other firms (''copy cats'') to demand similar treatm ent. At worst, it loses the firm and has to deal with the additional t hreats. Tax incentive packages can cost much more than foregone revenu es related to the single threatening firm. We solve a local government 's constrained optimization problem to identify its optimal response i n a game theoretic framework with asymmetric information. Industrial r ecruitment is modeled as a sealed-bid process in which the government does not know what alternative tax package(s) may be offered to the fi rm. We show that the probability of a relief offer being the optimal r esponse is positively related to the rate of expansion and indirect re venue (income and sales taxes related to firm activity in the locale) and negatively related to copy cat costs and the magnitude of tax reli ef. The problem is analyzed theoretically and graphically. The choice rules are related to other empirical work and illustrated numerically.