Working Paper: CEPR ID: DP10578
Authors: Marius Brlhart; Helen Simpson
Abstract: We study how industry-level agglomeration economies affect government policy. Using administrative data on firm subsidies in economically lagging regions of Great Britain, we test two alternative hypotheses. Economic geography models imply that firms at an industry?s core can sustain higher tax burdens or require lower subsidies than firms in more remote locations. Conversely, political economy models predict firms at the industry?s core to be more successful at lobbying government, particularly at the sub-national level, thus obtaining more favourable fiscal treatment. We find that local government agencies structure subsidy offers to favour pre-existing employment in locally agglomerated industries, behaviour more in line with theories of policy capture than with economic geography models.
Keywords: agglomeration; policy capture; regional grants; taxation
JEL Codes: H25; H32; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms in more agglomerated industries (R32) | Request higher per-job subsidies (J68) |
| Request higher per-job subsidies (J68) | Internalize agglomeration economies (R32) |
| Firms located further from existing industry employment (R30) | No increase in subsidy requests (H29) |
| More agglomerated industries (L79) | Government offers less generous subsidies per firm (H32) |
| Local government agencies favor existing employment in agglomerated industries (R38) | Policy capture models (C59) |
| Firms in declining industries (L19) | Lobby more effectively for subsidies (D72) |
| Lobbying more effectively for subsidies (D72) | Higher offers for firms focused on safeguarding existing jobs (M51) |
| Firms focused on safeguarding existing jobs (L26) | Higher offers compared to those creating new jobs (J23) |