Government's subsidy for attracting enterprises and balanced regional development

Abstract

This paper investigates Cournot competition between two firms, where the government offers subsidies to one firm to attract it to the government's objective region. If the firm accepts the offer, it incurs additional costs because the government's objective region is not the firm's optimal location. I find that a firm receiving the offer accepts it when the subsidy is larger than the additional cost in a perfect information situation. However, if the additional cost is the firm's private information, a situation exists where the firm accepts the offer even if the additional cost is larger than the government's subsidy.