Working Paper: NBER ID: w20975
Authors: Ralph Ossa
Abstract: I use a quantitative economic geography model to explore subsidy competition among U.S. states. I ask what motivates state governments to subsidize firm relocations and quantify how strong their incentives are. I also characterize fully non-cooperative and cooperative subsidy choices and assess how far away we are from these extremes. I find that states have strong incentives to subsidize firm relocations in order to gain at the expense of other states. I also find that observed subsidies are closer to cooperative than non-cooperative subsidies but the potential losses from an escalation of subsidy competition are large.
Keywords: subsidy competition; economic geography; agglomeration externalities
JEL Codes: F12; F13; R12; R58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| states have strong incentives to subsidize firm relocations (R38) | economic advantages over other states (H79) |
| optimal subsidies (H21) | economic advantages for states (H79) |
| optimal subsidies (H21) | economic disadvantages for neighboring states (F69) |
| observed subsidies are much closer to cooperative than noncooperative subsidies (C71) | states are not fully engaged in a subsidy war (H79) |
| escalating subsidy competition (H29) | inefficiency of beggar-thy-neighbor policies (F68) |
| agglomeration externality (R11) | states seek to attract firms (F23) |