State governments in the United States have been increasingly using business incentives such as grants and tax abatements to compete for firms. I examine the welfare consequences of this competition. I develop a model of state government competition and firm location choice combining a first-price auction among states with discrete choice by firms. I estimate this model using firm-level data on accepted incentives augmented with data on state attributes. To learn about state valuations for attracting firms and firms' geographic preferences, I exploit the first-order conditions for states' optimal bidding strategies and variation in firms' accepted offers and locations. I find that competition improves the overall welfare of states and firms despite the deadweight loss of taxation incurred by incentive provision. Firms benefit substantially by capturing rents from states. States that are less profitable for firms without incentives tend to have higher valuations for firms and benefit from competition. When taking into account the deadweight loss of taxation, states as a whole gain only modestly, as firm location choices are relatively unresponsive to incentives and the heterogeneity in state valuations is competed away. My findings are consistent with the view that state government competition using incentives generates large corporate welfare and little allocative efficiency when considering the deadweight loss of taxation, but does not fit the view that competition lowers overall welfare.
Work in Progress
Vacant Storefronts and Gentrification
Competition and Prolonged Process of Postdoctoral Training in Life Sciences with Jeff Qiu and Masayuki Sawada