Managing Regional Economic Risks due to the Entry and Exit of Global Firms

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This study presents a theory that the entry and exit behavior of global firms to/from a local city amplifies global economic risks to a regional economy. The theory employs the dynamic option game framework for capturing landwoner's starategic behaviors against the entry/exit of a global firm to a local city. The analysis reveals that the landlord's equilibrium strategy is to permit the firm's entry immediately when the volatility of the economic factor is sufficiently small, and that in the equilibrium under the firm's free exit rule, the landlord raises the rent as the volatility increases to cover the decrease in his expected revenue due to the increase in the risk of firm's exit. Comparing landowner's possible strategies, we further disclose that not endowing the firm with the exit option is the Pareto dominant strategy in the sense that the firm as well as the landowner are better off.