A Quantitative Analysis of Subsidy Competition in the U.S.

Ralph Ossa

NBER Working Paper No. 20975
Issued in February 2015
NBER Program(s):   ITI

What motivates regional governments to subsidize firm relocations and what are the implications of the subsidy competition among them? In this paper, I address these questions using a quantitative economic geography model which I calibrate to U.S. states. I show that states have strong incentives to subsidize firm relocations in order to gain at the expense of other states. I also show that subsidy competition creates large distortions so that there is much to gain from a cooperative approach. Overall, I find that manufacturing real income can be up to 3.9 percent higher if states stop competing over firms.

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Document Object Identifier (DOI): 10.3386/w20975

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