Government incentives and firm location choices

Donghyuk Kim () and Byoungmin Yu ()
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Donghyuk Kim: Iowa State University
Byoungmin Yu: Iowa State University

Public Choice, 2025, vol. 203, issue 1, No 13, 305-331

Abstract: 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.

Keywords: Inter-jurisdictional competition; Firm location choice; Business incentives (search for similar items in EconPapers)
JEL-codes: H73 L66 R12 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11127-024-01197-7

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