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The conflict between a city and a subsidy-seeking firm is modelled as a signalling game. Each firm has private information regarding its relocation opportunities and uses the threat of moving and the resulting loss in tax revenues to obtain a subsidy. The analysis shows that lobbying can be a socially desirable or undesirable activity depending on the probability of the firm having a profitable opportunity to move to some other city. If this probability is low, the city can increase welfare by committing to investigate the firm's claim before giving a subsidy.
Jörg Oechssler (Wed,) studied this question.