IDEAS home Printed from https://ideas.repec.org/a/kap/pubcho/v203y2025i1d10.1007_s11127-024-01197-7.html
   My bibliography  Save this article

Government incentives and firm location choices

Author

Listed:
  • Donghyuk Kim

    (Iowa State University)

  • Byoungmin Yu

    (Iowa State University)

Abstract

We study the welfare impact of states competing with non-discretionary incentives for firms in an industry. A simple model of state competition and firm location choice enables welfare calculation with the first-order condition for incentives and firm profit function parameters. The model implies that state values for firms must be substantially heterogeneous and negatively correlated with firm profits for state competition to improve welfare. In an application to the craft brewing industry, we estimate the profit function by instrumenting endogenous incentives with a proxy for past lobbying activities of brewers in other states. We find that state competition mostly transfers tax dollars to firms without changing their geography. This is because firm profits vary more than state values, even though states with lower firm profits value firms more.

Suggested Citation

  • Donghyuk Kim & Byoungmin Yu, 2025. "Government incentives and firm location choices," Public Choice, Springer, vol. 203(1), pages 305-331, April.
    • Handle: RePEc:kap:pubcho:v:203:y:2025:i:1:d:10.1007_s11127-024-01197-7
    DOI: 10.1007/s11127-024-01197-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11127-024-01197-7
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11127-024-01197-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Stephen Gibbons & Henry G. Overman, 2012. "Mostly Pointless Spatial Econometrics?," Journal of Regional Science, Wiley Blackwell, vol. 52(2), pages 172-191, May.
    2. Juan Carlos Suárez Serrato & Owen Zidar, 2016. "Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 106(9), pages 2582-2624, September.
    3. Bombardini, Matilde & Trebbi, Francesco, 2011. "Votes or money? Theory and evidence from the US Congress," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 587-611, August.
    4. Slattery, Cailin & Tazhitdinova, Alisa & Robinson, Sarah, 2023. "Corporate political spending and state tax policy: Evidence from Citizens United," Journal of Public Economics, Elsevier, vol. 221(C).
    5. Enrico Moretti & Daniel J. Wilson, 2017. "The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists," American Economic Review, American Economic Association, vol. 107(7), pages 1858-1903, July.
    6. Jorge Alé‐Chilet & Juan Pablo Atal, 2020. "Trade associations and collusion among many agents: evidence from physicians," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1197-1221, December.
    7. Diana W. Thomas & Peter T. Leeson, 2012. "The brewer, the baker, and the monopoly maker," Journal of Entrepreneurship and Public Policy, Emerald Group Publishing Limited, vol. 1(1), pages 84-95, April.
    8. Carlianne Patrick & Heather M. Stephens, 2020. "Incentivizing the Missing Middle: The Role of Economic Development Policy," Economic Development Quarterly, , vol. 34(2), pages 154-170, May.
    9. David R. Agrawal & William H. Hoyt & John D. Wilson, 2022. "Local Policy Choice: Theory and Empirics," Journal of Economic Literature, American Economic Association, vol. 60(4), pages 1378-1455, December.
    10. Trey Malone & Jayson L. Lusk, 2016. "Brewing up entrepreneurship: government intervention in beer," Journal of Entrepreneurship and Public Policy, Emerald Group Publishing Limited, vol. 5(3), pages 325-342, November.
    11. Evan Mast, 2020. "Race to the Bottom? Local Tax Break Competition and Business Location," American Economic Journal: Applied Economics, American Economic Association, vol. 12(1), pages 288-317, January.
    12. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
    13. Eline Poelmans & John A. Dove & Jason E. Taylor, 2018. "The politics of beer: analysis of the congressional votes on the beer bill of 1933," Public Choice, Springer, vol. 174(1), pages 81-106, January.
    14. Diana W. Thomas & Peter T. Leeson, 2012. "The brewer, the baker, and the monopoly maker," Journal of Entrepreneurship and Public Policy, Emerald Group Publishing Limited, vol. 1(1), pages 84-95, April.
    15. Kim, Donghyuk, 2023. "Economic spillovers and political payoffs in government competition for firms: Evidence from the Kansas City Border War," Journal of Public Economics, Elsevier, vol. 224(C).
    16. Mark Partridge & Sydney Schreiner & Alexandra Tsvetkova & Carlianne Elizabeth Patrick, 2020. "The Effects of State and Local Economic Incentives on Business Start-Ups in the United States: County-Level Evidence," Economic Development Quarterly, , vol. 34(2), pages 171-187, May.
    17. Kenneth G. Elzinga & Alexander J. McGlothlin, 2022. "Has Anheuser-Busch Let the Steam Out of Craft Beer? The Economics of Acquiring Craft Brewers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(2), pages 147-173, March.
    18. Russell S. Sobel & Gary A. Wagner & Peter T. Calcagno, 2024. "The political economy of state economic development incentives: A case of rent extraction," Economics and Politics, Wiley Blackwell, vol. 36(1), pages 104-151, March.
    19. Carlianne Patrick, 2016. "Identifying The Local Economic Development Effects Of Million Dollar Facilities," Economic Inquiry, Western Economic Association International, vol. 54(4), pages 1737-1762, October.
    20. Wesley Blundell & Kyle Wilson, 2023. "Acquisitions, product variety, and distribution in the U.S. craft beer industry," Economic Inquiry, Western Economic Association International, vol. 61(4), pages 1053-1076, October.
    21. Bart Bronnenberg & Jean-Pierre Dubé & Joonhwi Joo, 2022. "Millennials and the Takeoff of Craft Brands: Preference Formation in the U.S. Beer Industry," Marketing Science, INFORMS, vol. 41(4), pages 710-732, July.
    22. Kim, Donghyuk, 2023. "Market size, competition, and entrepreneurs’ location choices," Economics Letters, Elsevier, vol. 229(C).
    23. Ferrari, Alessandro & Ossa, Ralph, 2023. "A quantitative analysis of subsidy competition in the U.S," Journal of Public Economics, Elsevier, vol. 224(C).
    24. Jan K. Brueckner, 2003. "Strategic Interaction Among Governments: An Overview of Empirical Studies," International Regional Science Review, , vol. 26(2), pages 175-188, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kim, Donghyuk, 2023. "Economic spillovers and political payoffs in government competition for firms: Evidence from the Kansas City Border War," Journal of Public Economics, Elsevier, vol. 224(C).
    2. Andrew Hanson, 2021. "Taxes and Economic Development: An Update on the State of the Economics Literature," Economic Development Quarterly, , vol. 35(3), pages 232-253, August.
    3. Beatrix Eugster & Raphaël Parchet, 2019. "Culture and Taxes," Journal of Political Economy, University of Chicago Press, vol. 127(1), pages 296-337.
    4. David R. Agrawal & Marie-Laure Breuillé & Julie Le Gallo, 2025. "Tax Competition With Intermunicipal Cooperation," National Tax Journal, University of Chicago Press, vol. 78(1), pages 5-43.
    5. Buettner, Thiess & Poehnlein, Maximilian, 2024. "Tax competition effects of a minimum tax rate: Empirical evidence from German municipalities," Journal of Public Economics, Elsevier, vol. 236(C).
    6. Xavier Giroud & Joshua Rauh, 2015. "State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data," NBER Working Papers 21534, National Bureau of Economic Research, Inc.
    7. Pablo D Fajgelbaum & Eduardo Morales & Juan Carlos Suárez Serrato & Owen Zidar, 2019. "State Taxes and Spatial Misallocation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 333-376.
    8. Marius Brülhart & Jayson Danton & Raphaël Parchet & Jörg Schläpfer, 2025. "Who Bears the Burden of Local Taxes?," American Economic Journal: Economic Policy, American Economic Association, vol. 17(1), pages 464-505, February.
    9. Kim, Donghyuk, 2020. "Economic Spillovers and Political Values in Government Competition for Firms," ISU General Staff Papers 202009280700001111, Iowa State University, Department of Economics.
    10. Peter T. Leeson & Henry A. Thompson, 2023. "Public choice and public health," Public Choice, Springer, vol. 195(1), pages 5-41, April.
    11. Nicolas Debarsy & Julie Le Gallo, 2024. "Identification of spatial spillovers: Do’s and don'ts," Working Papers hal-04549691, HAL.
    12. Agrawal, David R., 2014. "LOST in America: Evidence on local sales taxes from national panel data," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 147-163.
    13. Agrawal, David R., 2016. "Local fiscal competition: An application to sales taxation with multiple federations," Journal of Urban Economics, Elsevier, vol. 91(C), pages 122-138.
    14. Guo, Audrey, 2020. "The Effects of Unemployment Insurance Taxation on Multi-Establishment Firms," MPRA Paper 97919, University Library of Munich, Germany.
    15. Cailin R. Slattery & Owen M. Zidar, 2020. "Evaluating State and Local Business Tax Incentives," NBER Working Papers 26603, National Bureau of Economic Research, Inc.
    16. Peter T. Leeson & M. Scott King & Tate J. Fegley, 2020. "Regulating quack medicine," Public Choice, Springer, vol. 182(3), pages 273-286, March.
    17. Cailin Slattery & Owen Zidar, 2020. "Evaluating State and Local Business Incentives," Journal of Economic Perspectives, American Economic Association, vol. 34(2), pages 90-118, Spring.
    18. Ferrari, Alessandro & Ossa, Ralph, 2023. "A quantitative analysis of subsidy competition in the U.S," Journal of Public Economics, Elsevier, vol. 224(C).
    19. Xavier Giroud & Joshua D. Rauh, 2016. "State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data," Economics Working Papers 16103, Hoover Institution, Stanford University.
    20. Colas, Mark & Saulnier, Emmett, 2023. "Vertical migration externalities," Regional Science and Urban Economics, Elsevier, vol. 101(C).

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:pubcho:v:203:y:2025:i:1:d:10.1007_s11127-024-01197-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.