Bidding for Firms: Subsidy Competition in the U.S.

In the U.S., states compete to attract firms by offering discretionary tax breaks and subsidies, but little is known about (1) the way states choose their subsidy bids, and (2) whether such subsidies affect firms' location choices. If subsidies cause firms to locate in states where they have larger positive spillovers, subsidy competition can increase total welfare. In this paper, I develop a model of state governments bidding for firms, where states value both the direct and indirect (spillover) job creation of firms. States compete for each firm in an oral ascending auction, and firms take both subsidies and state characteristics into account when choosing their location. To estimate my model, I hand collect a unique dataset on state incentive spending and subsidy deals from 2002-2016. I estimate both the distribution of states' valuations for firms that rationalizes observed subsidy offers, and firms' valuations for state characteristics. I provide the first empirical evidence that states use subsidies to help large firms internalize the positive externality, in the form of indirect job creation, they have on states. Moreover, these subsidies have a sizable effect on firm locations. I estimate 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%.