Local Fiscal Strategy to Retain Heterogeneous Firms

This paper is about the strategy of retaining unobserveably heterogeneous firms attracted by unobserveably valued outside alternatives. We prove that differentiating tax/public good fiscal packages within one?s own locale dominates offering the same packages to all firms. We rationalize the full range of observed practice by considering more than one type of firm, more than one type of fiscal instrument, and all kinds of utility in alternative locations, under asymmetric information. Mobile agents can earn rents under some conditions, and immobile agents earn rents under others. Ways to minimize budgetary exposure in tax wars and effects on the composition of local economies are discussed.