Economics Working Papers

Publication Date

9-28-2020

Number

20017

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.

JEL Classification

H25, L20, R38

Version History

Original Release Date: September 28, 2020

Departments

Department of Economics, Iowa State University

File Format

application/pdf

Length

24 pages

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