Cailin Slattery Presents at Urban Economics Association Meeting

Thursday, November 1, 2018

Cailin Slattery presented her job market paper "Bidding for Firms: Subsidy Competition in the U.S." at the Urban Economics Association Meeting at Columbia University in New York City. She received valuable feedback on her paper and discussed her research with Urban Economists from all over the world. She also had the opportunity to attend talks by Ed Glaeser, Raj Chetty, and recent Nobel Laureate Paul Romer.

In her job market paper, Cailin studies how U.S. states use discretionary tax breaks and subsidies to compete for individual firms to locate and create jobs in their jurisdictions. This policy has been well publicized with the recent competition for Amazon's second headquarters, but it is not an Amazon-specific phenomenon --- states spend billions of dollars each year on discretionary subsidies to attract a handful of large firms. However, it is still debated whether subsidy competition is a zero-sum game which only serves to transfer rent from states to firms at no national welfare gain, or if subsidies actually cause firms to locate where they create more value for a state. 

In order to address this debate empirically, Cailin hand-collected a new data set on state level incentive spending and firm-level subsidy deals. She then uses the data to estimate a model of subsidy competition, where states bid for individual firms in an oral ascending auction. This allows her to answer two open questions about subsidy competition: how do states value a given firm, and how important are subsidies to a firms' location decision?  Her estimates provide the first empirical evidence that states use subsidies to help large firms internalize the positive externalities they have in a state. Specifically, she find that states value not only the direct jobs the firm promises to create when determining their subsidy offer, but also the indirect jobs they are expected to create through agglomeration.

Next, she uses the model to estimate the effects of a counterfactual subsidy ban, and evaluate the welfare implications of subsidy competition.  Her counterfactual results confirm that subsidy competition is not a zero-sum game. In fact, competition increases total welfare (the joint payoffs of states and firms) by 20% over the subsidy ban. However, the entirety of this welfare gain is captured by the firms. Although individual states are better off, the aggregate welfare of states decreases relative to the subsidy ban. In short, the states, as a whole, are worse off with competition, because they have competed away much of the value a firm creates in their location.