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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
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    More about this item

    Keywords

    Inter-jurisdictional competition; Firm location choice; Business incentives;
    All these 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

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