Abstract
In the U.S., states compete to attract firms by offering discretionary subsidies, but little is known about how states choose their subsidy offers, whether such subsidies affect firms' location choices, and what effect the subsidies have on economic growth. In this dissertation, I leverage a unique, hand-collected dataset on state incentive spending and subsidy deals to provide new evidence on state subsidy-giving and economic development policies.
In Chapter 1, 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. 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. 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 location. With subsidies, total welfare (the sum of state valuations and firm profits) increases by 22%, but the welfare gain is captured entirely by the firms.
In the second chapter, I study political motivations for subsidy-giving. 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. My results suggest that campaign spending is likely a factor in states' subsidy-setting decisions.
Lastly, in joint work with Owen Zidar, I spend more time describing the structure of state business incentives, and provide some preliminary analysis on whether or not they work. We compare "winning'' and runner-up locations for each subsidy deal, and do not find strong evidence that discretionary subsidies increase employment and economic growth within a county. Overall, firms make location and investment decisions to maximize after-tax profits, which depend strongly on non-tax factors such as wages, market access, productivity, and amenities. Although larger establishment shares are associated with higher per capita incentive spending at the state level, increases in incentive spending do not lead to increases in establishment entry, as poorer places are more likely to provide larger incentives.
