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

NBER Working Paper No. 20975

Issued in February 2015, Revised in October 2017

NBER Program(s):International Trade and Investment



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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w20975

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