In the U.S., states compete to attract firms by offering discretionary subsidies, but little is known about how states choose their subsidy offers, and whether such subsidies affect firms' location choices. In this paper, I use an oral ascending (English) auction to model the subsidy “bidding” process and estimate the efficiency of subsidy competition. The model allows state governments to value both the direct and indirect (spillover) job creation of firms when submitting bids, and firms to take both subsidies offered and state characteristics into account when choosing their location. To estimate my model, I hand-collect a new and unique dataset on state incentive spending and subsidy deals from 2002-2016. I estimate both the distribution of states' (revealed) valuations for firms that rationalizes observed subsidies, and firms’ valuations for state characteristics. In order to allow states to value potential spillovers, I estimate the effect of subsidy-winning firms’ locations on the entry decision of smaller firms, using a discrete choice entry model. I provide the first empirical evidence that states use subsidies to help large firms internalize the positive spillovers, in the form of indirect job creation, they have on the states. Moreover, subsidies have a sizable effect on firm locations. In particular, I find that without subsidies approximately 68% of firms would locate in a different state, and the number of anticipated indirect jobs created would decrease by 32%. With subsidies, total welfare (the sum of state valuations and firm profits) increases by 22%, and this welfare gain is captured entirely by the firms.
How do states decide how much to spend on incentives for firms? I identify the effect of corporate campaign spending on state subsidy-giving to firms by exploiting variation created by the 2010 Citizens United v. FEC Supreme Court case, which allowed corporations to spend on elections in 24 states that previously had spending bans. I find that treatment states are 23 percentage points more likely to give a second subsidy to a firm that is already located in the state. I also find that total incentive spending increases by over $150 million. My results suggest that campaign spending is a factor in states' subsidy-setting decisions.
Works in Progress
Legislation, Deregulation and Litigation: The 1970-1990 Demand Shift for U.S. Legal Services (with Ariell Reshef)
We study the evolution of employment and wages in U.S. legal services and of lawyers from 1850 to 2015. We argue that important legislation and deregulation events, starting in the mid-1960s and lasting throughout the 1980s, increased demand for legal services. In contrast to stability in other periods, 1970-1990 stands out with a sharp increase of the employment share of legal services, doubling from 0.53% to 1.15%; the employment share of lawyers increases commensurately, from 0.28% to 0.53%. During the same period the relative wage of legal services increased by 0.7; starting from much higher levels, relative wages of lawyers and of law firm partners increased more, by 1.8 and 1.3, respectively, contributing significantly to greater inequality. An important mechanism through which the demand shift manifests itself is the so-called "litigation explosion." Other factors, e.g. technological change, are not important determinants of the demand shift.
High-skilled Immigration and the University: Has H-1B visa policy increased industry dependence on university resources?
The American Competitiveness Act of 2000 exempted universities from the annual visa cap for high-skilled immigrant workers. Four years later the H-1B Visa Reform Act of 2004 tightened the visa cap for firms. This paper examines whether firms in close proximity to research universities have responded to this constraint by investing in research with the university and whether the university cap-exemption has had positive spillover effects on local area industry growth. I use a difference-in-differences approach to evaluate the effects of the visa policy, employing a treatment that captures the variation in relevance of local university innovation to each industry. My preliminary results indicate that firms are investing in university research in response to the visa policy and that the university cap-exemption has indirectly affected local industry, leading to increases in both employment and the number of establishments.