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Economic Spillovers and Political Values in Government Competition for Firms

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  • Kim, Donghyuk

Abstract

This paper examines how economic spillovers and political values affect strategies and welfare of governments bidding for firms. Government competition and firm location choice are modeled as a variant of a first-price scoring auction in which governments compete for firms that have unobserved geographic preferences. Within-metro economic spillovers generate freeriding motives, implying that metro-level coordination can improve joint expected welfare of individual governments. However, presence of political values can steer governments away from coordination such as ceasefire on incentive provision. Reduced-form evidence suggests that political values increase with the intensity of within-metro competition and that governments freeride when economic values spill over. Measures of economic spillovers are informative of the size of political values; back-of-the-envelope calculations suggest that total political values for 112 firms that relocated within Kansas City amount to over $89 million.

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  • Kim, Donghyuk, 2020. "Economic Spillovers and Political Values in Government Competition for Firms," ISU General Staff Papers 202009280700001111, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:202009280700001111
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