Fiscal Competition and Polluting Firm' Location Under Incomplete Information.

The main result of this paper is that when two asymmetric regions compete in pollution taxes to attract a polluting firm, optimal location will happen under complete information but not necessarily under incomplete information. It is shown that incomplete information on regions' pollution costs may lead to a bias towards location in a region that does not maximize net total benefits. This bias is more likely to occur if a region believes that the other region has a ``high'' marginal cost of pollution. Also, this bias tends to disappear with large discrepancies in production costs.