Bidding for Firms: Subsidy Competition in the United States

Abstract

State and local governments in the United States compete to attract firms by offering discretionary subsidies. I use a private value English auction to model the subsidy bidding process and quantify the welfare effects of competition. The allocation of rents between states and firms depends on the heterogeneity in states’ valuations for firms and the substitutability of locations. I find that competition increases welfare by less than 5% over a subsidy ban, and states compete away the surplus, transferring all of the rents to firms. These findings dampen any interpretation of subsidy competition as an effective place-based policy.