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.
H25, L20, R38
Original Release Date: September 28, 2020
Department of Economics, Iowa State University
Kim, Donghyuk, "Economic Spillovers and Political Values in Government Competition for Firms" (2020). Economics Working Papers: Department of Economics, Iowa State University. 20017.