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.
We describe and evaluate state and local business incentives in the United States. We use new data sets at the firm and state level from Slattery (2019) to characterize these incentive policies, describe the selection process that determines which places and firms give and receive incentives, and then evaluate the economic consequences. In 2014, states spent between $5 and $216 per-capita on incentives for firms in the form of tax credits, job training, grant programs, and infrastructure spending. Recipients are usually large establishments in manufacturing, technology, and high-skilled service industries, and the average discretionary subsidy is $157M for 1,660 promised jobs. Firms accept deals from places that are richer, larger, and more urban than the average county, and poor places provide larger incentives and spend more per job. Comparing “winning” and runner-up locations for each deal in a bigger and more recent sample than in prior work, we find that average employment within the 3-digit industry of the deal increases by nearly 2000 jobs. There is some weak evidence of employment spillovers and establishment entry within the broader sector, but there is no detectable impact on overall county-level employment or economic growth. At the state level, increases in incentive spending tend not lead to increases in establishment entry as poorer places are more likely to provide larger incentives. Overall, while we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence in support of local tax incentives increasing broader economic growth at the state and local level.
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.