Abstract

In the United States, state and local governments compete to attract firms by offering discretionary subsidies. I use a private value English auction to model the subsidy bidding process and quantify the welfare effects of competition. The allocation of rents between states and firms depends on the heterogeneity in states' valuations for firms and the substitutability of locations. I find that competition increases welfare by 30% over a subsidy ban, but states compete away the surplus, transferring the majority of rents to firms. Moreover, political concerns affect states' valuations for firms. These findings dampen any interpretation of subsidy competition as an effective place-based policy.

Citation

Slattery, Cailin. "Bidding for Firms: Subsidy Competition in the U.S." Columbia Business School, December 11, 2020.

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