Local Agents’ Cooperation as a Signal Game: Firms, Local Governments and Investment Strategies

Abstract

The aim of this paper is to examine the strategies of cooperation and conflict adopted by two dominant local agents in order to maximize their payoffs. Research uses as methodological tool a signal game that informs actors about potential gains and risks. Two actors support the game, namely local government with a high level of competences, and a local firm. Local government has significant power in the field of local entrepreneurship while local firm is interested in running a new investment in the region.The game is constructed using signals that either guarantee payoffs or produce losses for both actors. Local firm confronts two options: to run the investment project in the local jurisdiction or to defect. Intraregional cooperation among local actors determines the options of equilibrium in the game generating conditions for local development. Sufficient condition for attracting investment prerequisites high levels of cooperation between local government and firm. The capacity of local government to implement effectively the reform is the key variable of the game. As a sequence: (a) Local actors should adopt strategies that relate their profits with the prosperity of the region, (b) Policy implications of local government should focus on the transformation of its function, in order to attract investments and successively to improve local welfare.