marshall s scale economies using panel data this paper estimates plant level production functions for machinery and high tech industries that allow for scale externalities from other plants in the same industry locally and from the scale or diversity of local economic activity outside the own industry the paper finds that the count of other own industry plants representing a count of local information spillover sources has strong productivity effects in high tech but not machinery industries single plant firms both benefit more from and generate greater external benefits than corporate plants given their greater reliance on external environments on dynamic externalities high tech single plant firms benefit also from the scale of past own industry activity i find little evidence of economies from the diversity or scale of local economic activity outside the own industry

optimal growth with many consumers abstract a method is described for constructing all pareto optimal allocations for a dynamic economy with many heterogeneous consumers under certainty in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time optimal perfect foresight competitive equilibrium allocations are obtained through the study of a dynamic program for an economy with one consumption good sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth for a two person exchange economy sufficient conditions are given for the global asymptotic stability of the unique interior stationary point

long run effects of public sector sponsored training in west germany between 1991 and 1997 west germany spent on average about 3 6 bn euro per year on public sector sponsored training programmes for the unemployed we base our empirical analysis on a new administrative data base that plausibly allows for selectivity correction by microeconometric matching methods we identify the effects of different types of training programmes over a horizon of more than seven years using bias corrected weighted multiple neighbours matching we find that all programmes have negative effects in the short run and positive effects over a horizon of about four years however for substantive training programmes with duration of about two years gains in employment probabilities of more than 10 points appear to be sustainable but come at the price of large negative lock in effects

state investment tax incentives a zero sum game abstract over the past four decades state investment tax incentives have proliferated this emergence of state investment tax credits itc and other investment tax incentives raises two important questions 1 are these tax incentives effective in achieving their stated objective to increase investment within the state 2 to the extent these incentives raise investment within the state how much of this increase is due to investment drawn away from other states to begin to answer these questions we construct a detailed panel dataset for 48 states for 20 years the dataset contains series on output and capital their relative prices and establishment counts the effects of tax variables on capital formation and establishments are measured by the jorgensonian user cost of capital that depends in a nonlinear manner on federal and state tax variables cross jurisdictional differences in state investment tax credits and state corporate tax rates entering the user cost combined with a panel that is long in the time dimension are key to identifying the effectiveness of state investment incentives two models are estimated the capital demand model is motivated by the first order condition for a profit maximizing firm and relates at the state level the capital output ratio to the relative user cost of capital the twin counties model exploits both the spatial breaks discontinuities in tax policy at state borders and our panel dataset to relate at the county level the relative user cost to the location of manufacturing establishments using the capital demand model we find that own state capital formation is substantially increased by tax induced reductions in the own state price of capital and more interestingly substantially decreased by tax induced reductions in the price of capital in competitive states similarly using our twin counties model we find that county manufacturing establishment counts around state borders are higher on the side of the border with the lower price of capital but the difference is economically small suggesting that establishments are much less mobile than overall capital extensions of the capital demand model also reveal that state capital tax policy appears to be a zero sum game among the states in that an equiproportionate increase in own state and competitive states user costs tends to have no effect on own state capital formation

a theory of interregional tax competition a general equilibrium model is constructed to study tax competition where local governments compete for capital by holding down property tax rates and public expenditure levels an exact definition of tax competition is provided and both the existence and nonexistence of tax competition are shown to be theoretically possible it is argued however that tax competition must occur under empirically reasonable conditions inefficiency in public production is also explicitly modeled the amount of capital used to produce a given level of public service output is shown to be greater than that which is required to minimize costs evaluated at the prices facing private firms

admiration is a source of multiple equilibria and indeterminacy a comment on chen and hsu 2007 abstract the aim of this note is to revise and correct the properties of steady state s obtained in chen and hsu 2007 they proved that admiration and decreasing marginal impatience may establish indeterminacy when the steady state is unique instead we prove that in the long run equilibrium equilibria i indeterminacy never occurs when the steady state is unique and ii indeterminacy may occur only when the steady states are not unique

persistent inequality an explanation based on limited parental altruism abstract this paper proposes an alternative theory for the observed persistence in income inequality across households a theory based on limited parental altruism we argue that the degree of parental altruism is limited by the economic status of the parent a poor parent not only has less ability but also has less willingness to invest in children s human capital formation this generates a non linearity in such investment expenditures as a result initial income differences may perpetuate over time even with convex technology and convex preferences in this context we also compare the efficacy of the public vis a vis the private education system from the perspective of long run growth

measuring the economic effects of military base closures michael m knetter i introduction military spending in the united states has been reduced dramatically in recent years federal outlays on national defense fell from 6 2 of gdp in 1986 to 3 2 in 1998 a decline of about 25 in real dollar terms 1 one important component of this drawdown has been the closure of dozens of military bases and the realignment partial closure of combination of many more while most observes in government the military and the involved communities have agreed that defense could and should be downsized in this post cold war budget balancing environment the decisions of which bases to close have been highly contentious in fact opposition o closures has been sufficiently intense for a bipartisan base realignment and closure brac commission to be appointed with special procedures for the base selection process to minimize political interference 2 this resistance to base closures stems primarily from perceived adverse economic consequences the facts that bases often constitute a large fraction of local economic activity representing up to one third of a county s employment in some cases and the taxes which pay salaries of base employees come almost entirely from outside the region both underlie the widely held belief that bases are worth fighting for what may be overlooked by communities and their representatives is the opportunity cost of resources that bases occupy principally land many bases are on coasts in metropolitan areas or have other attributes that make for high values in alternative use two examples among recent closures are the presidio army base in san francisco and moffett field naval air station in silicon valley in such cases local economies may actually be better off after a closure at least following a temporary adjustment period when some transition and cleanup costs are incurred given uncertainty about the likely economic consequences of base closures and the substantial resources that have been expended to prevent them it would seem important to evaluate the economic costs of past closures however it appears that little such analysis exists a search in econlit found only 11 entries for either base closures or military bases with none of the referenced articles empirical the evidence seems mainly limited to case studies notably dardia et al 1996 a report recently published by rand that studied three closures in california in the early 1990s bradshaw et al 1995 reviews a number of such studies and the department of defense s dod civilian reuse of former military bases publications collect several newspaper articles summarizing closure communities redevelopment experiences mostly prior to 1978 3 an important exception is a recent paper by krizan 1998 which uses longitudinal micro data to study the impact of base closures in california in this article we attempt to fill that gap we have compiled a database from dod reports that includes the total number of military and civilian jobs eliminated in all of the major base closures that have taken place since 1970 we match this data with the employment per capita personal income and population data in prior and succeeding years for base counties and their states and use the combined data to assess the economic impacts of the closures our final database contains 57 closures ranging in absolute size from 150 to over 16 000 jobs they represent from 05 to over 30 of county employment with the median closure equaling 2 24 we measure counties responses to these shocks compared to two counterfactual scenarios one which assumes that the county would have had employment or per capita personal income growth at the state s rate and another which assumes that the difference between county and state growth rates which prevailed in the pre closure years would have persisted these assumptions control for any region specific shocks that would be expected to impact counties and their states roughly equally

aggregate spending and the terms of trade is there a laursen metzler effect this paper investigates the spending and current account effects of terms of trade shifts in a model where households maximize utility over an infinite planning period in the framework developed here an economy specialized in production must experience a fall in aggregate spending and a current surplus as a result of an unanticipated permanent worsening in its terms of trade the paper s model thus provides a setting in which the current account deficit predicted by laursen and metzier harberger and others fails to materialize

a dynamic game model of strategic capacity investment in the cruise line industry abstract in this paper the cruise line industry is characterized as an oligopoly where a finite number of cruise lines compete to maximize their profits over a fixed planning horizon the oligopolistic competition is modeled as a n person nonzero sum noncooperative dynamic game the noncooperative nash equilibrium capacity investment strategies of cruise lines are theoretically analyzed under the open loop information structure the necessary conditions for an open loop nash equilibrium solution are derived using a pontryagin type maximum principle and the sufficient conditions are also established the economic interpretation of the optimality conditions is given so as to demonstrate the difference between the static and dynamic oligopoly problems the dynamic oligopolistic competition of three cruise lines in a hypothetical setting is also numerically analyzed by using the iterative algorithm numerical results provide a number of important managerial guidelines for cruise capacity investment decisions the paper concludes with a discussion on future research directions

factor income distribution and endogenous economic growth piketty meets romer what is the relationship between the economy s long run growth rate its capital income ratio and its factor income distribution a satisfactory answer requires an endogenous growth and savings rate we scrutinize piketty s 2014 theory in a richly parameterized variant of romer s 1990 seminal model with and without population growth the economy s growth and savings rate are exogenous in piketty s theory and endogenous in romer s in contrast to piketty s second fundamental law of capitalism a smaller growth rate may be associated with a smaller capital income ratio moreover it may go together with a greater or a smaller capital share jel e10 e21 e25 o33 o41

bidding for firms recently toyota sought a plant location in the united states the 800 million plant will employ 3000 workers and numerous states offered toyota generous investment incentives hoping this would induce toyota to select their state the commonwealth of kentucky won this competition but the price was high the present value of the payments exceeds 125 million the payment of investment incentives for the toyota plant is not unique in 1976 pennsylvania paid 75 million to attract a volkswagen plan nissan honda and mazda received generous investment incentives when locating plants in the united states and this bidding is not limited to states to attract the headquarters of the presbyterian church usa with its 1300 jobs and 38 million annual payroll civic leaders in louisville kentucky offered the church a warehouse and 6 2 million for renovation of the structure bidding the church away from kansas city missouri in this paper we contend that this competition may result from the average cost pricing of publicly provided goods and services 2 when the marginal cost of providing a firm and its workers with public services is less than the tax revenue they generate a government may offer the firm subsidies that reduce the distortions the average cost pricing of the public service creates thus this competition for industry is not a zero sum game where the subsidies are only transfers from the government to the firm rather these subsidies may facilitate the efficient location of industry

the credibility revolution in empirical economics how better research design is taking the con out of econometrics since edward leamer s memorable 1983 paper let s take the con out of econometrics empirical microeconomics has experienced a credibility revolution while leamer s suggested remedy sensitivity analysis has played a role in this we argue that the primary engine driving improvement has been a focus on the quality of empirical research designs the advantages of a good research design are perhaps most easily apparent in research using random assignment we begin with an overview of leamer s 1983 critique and his proposed remedies we then turn to the key factors we see contributing to improved empirical work including the availability of more and better data along with advances in theoretical econometric understanding but especially the fact that research design has moved front and center in much of empirical micro we offer a brief digression into macroeconomics and industrial organization where progress by our lights is less dramatic although there is work in both fields that we find encouraging finally we discuss the view that the design pendulum has swung too far critics of design driven studies argue that in pursuit of clean and credible research designs researchers seek good answers instead of good questions we briefly respond to this concern which worries us little

a simple dynamic general equilibrium model abstract we analyse a single sector economy with h 1 infinitely lived agents that operate in a continuous time framework utility functions are recursive but not additive both efficient and perfect foresight competitive equilibrium allocations are considered the existence and stability of such allocations are investigated locally i e in a neighbourhood of steady state allocations the model is shown to be useful for explaining the distribution of wealth and consumption across agents and for analysing the way in which wealth redistribution can affect the dynamics of aggregate economic variables

the harberger laursen metzler effect under capital market imperfections abstract this paper re examines the effects of a permanent terms of trade change on a dynamic small open economy facing an imperfect world capital market as studied in obstfeld 1982 aggregate spending and the terms of trade is there a laursen metzler effect quarterly journal of economics 97 251 270 which assumes that the economy faces a downward sloping bond curve the novelty of the present paper is that a saddle path stable steady state comes into existence under the assumption that households subjective discount rate is a decreasing function of instantaneous utility the harberger laursen metzler hlm effect is shown to hold unambiguously i e an unanticipated permanent terms of trade deterioration leads to an increase in aggregate expenditure and a current account deficit this result is in stark contrast to those obtained in obstfeld 1982 aggregate spending and the terms of trade is there a laursen metzler effect quarterly journal of economics 97 251 270 and many other studies in the literature

impatience and long run growth abstract this contribution is concerned with the possibility of a perpetual growth path at increasing rates in a nonconvex optimal growth model with endogenous discounting sufficient conditions for the existence of this path can be established when the economy is populated by agents whose impatience does not increase too much along the course of a consumption path in the opposite case the dynamical system is asymptotically described by a steady state however this steady state position need not be uniquely defined saddlepoint equilibria and locally oscillating unstable equilibria may alternate in spite of increasingly impatient agents along the growth process it remains optimal for a government to subsidize the competitive economy under a razor edge assumption on impatience a growing planning solution may coexist with a stationary competitive solution

the global stability of efficient intertemporal allocations this paper describes a continuous time model of an economy with finitely many infinitely lived consumers and a finite number of capital goods two objectives are achieved first recursive nonadditive utility functionals are formulated and analyzed second these preference functionals are applied to analyze the nature of efficient allocations in a dynamic economy two classes of global turnpike propositions are proven which provide the basis for a model of the long run distribution of wealth these propositions also provide new perspective regarding existing stability literature based on additive utilities copyright 1987 by the econometric society

the economic impact of the coal boom and bust in this paper we examine the impact of the coal boom in the 1970s and the subsequent coal bust in the 1980s on local labour markets in kentucky ohio pennsylvania and west virginia we address two main questions in our analysis how were non mining sectors affected by the shocks to the mining sector how did these effects differ between sectors producing local goods and those producing traded goods we find evidence of modest employment spillovers into sectors with locally traded goods but not into sectors with nationally traded goods

wages rents and the quality of life this study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities the theory demonstrates that if the amenity is also productive then the sign of the wage gradient is unclear while the rent gradient is positive the theory is extended to include the housing market and nontraded goods these extensions require little modification of the conclusion the empirical work on wages shows that the regional wage differences can be explained largely by these local attributes with the use of site price data implicit prices are estimated and quality of life rankings for the cities are computed

an evaluation of the swedish system of active labour market programmes in the 1990s we investigate the presence of short and long term effects from joining a swedish labor market program vis a vis more intense job search in open unemployment overall the impact of the program system is found to have been mixed joining a program has increased employment rates among participants a result robust to a misclassification problem in the data on the other hand it has also allowed participants to remain significantly longer on unemployment benefits and more generally in the unemployment system this being particularly the case for those entitled individuals entering a program around the time of their unemployment benefits exhaustion

the rate of time preference and dynamic economic analysis strong restrictions on the structure of preferences are a central feature in the received theory of intertemporal allocation in fact most of the modern literature concerned with capital theoretic problems represents preferences by a functional in which an additive utility function is discounted by a constant rate of time preference this specification is attractive because it is analytically tractable in dynamic models and it clearly delineates how tastes and opportunities interact to determine an economy s household s paths of consumption and capital formation however its rigid structure constancy of time preference severely limits the conclusions and explanatory power of the corresponding models this paper considers a class of utility functionals in continuous time which have the appealing feature that the rate of time preference depends systematically on an index of aggregate future consumption the more flexible structure embodied in these functionals leads to important generalizations and

optimal growth with decreasing marginal impatience abstract this paper analyses the long run dynamics of a continuous time infinite horizon optimal growth model with identical households where the households rate of time preference is endogenously determined however unlike the existing literature we assume that households have decreasing marginal impatience i e the instantaneous discount rate is negatively related to the current consumption with this assumption we analyse the stability and uniqueness of the long run equilibrium we show that contrary to the general belief a negative relationship between the instantaneous discount rate and the household s current consumption does not necessarily result in instability of the dynamic system however even a stable system may be characterized by multiple equilibria so that the initial condition becomes important in determining the long run behaviour of the economy we derive a set of sufficient conditions for stability and uniqueness in this context

the alaskan labor market during the pipeline era built between 1974 and 1977 the trans alaska pipeline was the largest privately financed construction project in world history the alaskan labor market during the pipeline era provides an ideal opportunity to view labor market responses to a large anticipated and temporary shock to labor demand the paper presents several theoretical models of market responses to temporary demand shocks and then assesses the ability of each model to explain the alaskan data among the findings are that alaskan wages were very flexible labor supply was quite elastic on both the intensive hours per worker and extensive number of workers margins and even a major short run demand shock need not have a long run impact

asymptotic behavior and optimal properties of a consumption investment model with variable time preference abstract this paper analyzes the convergence properties and the determination of an optimal consumption path in the consumption investment model of uzawa 1968 sufficient conditions for the existence and uniqueness of the optimal path are presented components of the utility functional are recovered when the optimal path is piecewise affine the model is applied to the determination of the interest rate and income distribution under time preference differentials

alternative approaches to evaluation in empirical microeconomics four alternative but related approaches to empirical evaluation of policy interventions are studied social experiments natural experiments matching methods and instrumental variables in each case the necessary assumptions and the data requirements are considered for estimation of a number of key parameters of interest these key parameters include the average treatment effect the treatment on the treated and the local average treatment effect some issues of implementation and interpretation are discussed drawing on the labour market programme evaluation literature

habits and time preference this paper proposes a utility function incorporating both habit formation and an endogenous rate of time preference in a manner consistent with the intuition of irving fisher regarding the influence of past consumption on impatience it is shown that the ne w specification is tractable and generates new predictions in the cont ext of three model economies 1 a closed economy with heterogeneous agents 2 a small open economy with one traded good and one nontra ded good and 3 a small open economy with a traded good and domestic money copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

rate of time preference intertemporal elasticity of substitution and level of wealth the rate of time preference rtp and the intertemporal elasticity of substitution ies are two important factors shaping intertemporal consumption decisions models in which the rtp and or the ies differ systematically between rich and poor households have different empirical and policy implications for economic development growth and the distribution of income and consumption from those of standard models in which these parameters are constant across households in this chapter we estimate a model in which both rtp and ies are allowed to differ across rich and poor households using household level panel data from india our empirical results are consistent with the view that the rtp is constant across poor and rich households but the ies is larger for the rich than it is for the poor

capital accumulation and the current account in a two country model abstract this paper examines the joint determination of international debt and capital accumulation in a two country model national rates of time preference are endogenous adjusting along an optimal path to come into equality with one another in the steady state the characteristics of short run current account dynamics are crucially linked to world capital accumulation and to a country s long run net external asset position steady state creditor countries tend to have current account surpluses during episodes of world output growth and vice versa for debtor countries this gives rise to possible non monotonic adjustment in the current account and consumption

effects of government spending on the current account with endogenous time preference this paper extends a previous model to set up a small open economy with perfect capital mobility and examines the effects of an unanticipated permanent rise in public spending on the optimal rates of private consumption and the current account the novelty of the paper is consideration of the relationship between private and public consumption in the household s utility function as well as endogenous rates of time preference it is found that the key factor determining the adjustment patterns of private consumption and the current account is the marginal utility of private consumption and of public spending which results from endogenous recursive preferences

the effects of foreign direct investment on local communities abstract little evidence exists on the effects of foreign direct investment fdi on local communities in the united states despite evidence that u s communities actively bid against each other for fdi we use detailed county level panel data from south carolina across 5 year intervals from 1980 through 1995 to investigate the effect of foreign manufacturing plants on local labor markets and on the level and distribution of local government budgets we find that foreign investment raises local real wages much more than does domestic investment but lowers per capita county government expenditures and redistributes monies away from public school expenditures

intertemporal dependence impatience and dynamics abstract this paper develops simple geometric methods for analyzing consumer behavior under recursive but intertemporally dependent tastes since the preferences studied need not be time additive they allow the marginal utility of consumption on a given date to vary with consumption on other dates intertemporal dependence is induced by the presence of a variable individual rate of time preference the optimal consumption responses to transitory and anticipated changes in incomes and interest rates are easily derived and are similar in many respects to the responses implied by the standard constant time preference model intuitive explanations of the first order conditions describing optimal paths are provided

loss aversion in aggregate macroeconomic time series abstract prospect theory has been the focus of increasing attention in many fields of economics however it has scarcely been addressed in macroeconomic growth models neither on theoretical nor on empirical grounds in this paper we use prospect theory in a stochastic optimal growth model thereafter the focus lies on linking the euler equation obtained from a prospect theory growth model of this kind to real macroeconomic data we will use generalized method of moments gmm estimation to test the implications of such a non linear prospect utility euler equation our results indicate that loss aversion can be traced in aggregate macroeconomic time series

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

government purchases and real interest rates with endogenous time preference abstract the observation of low real interest rates during periods of high temporary government purchases such as wars can be reconciled with the neoclassical growth model extended to allow for endogenous time preference temporary increases in government purchases lead to a fall in the instantaneous rate of time preference this may result in rising investment and falling real interest rates along an adjustment path

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

consumption paths under prospect utility in an optimal growth model this paper studies the cass koopmans ramsey model of optimal economic growth in the presence of loss aversion and habit formation the representative agent s preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of substitution cies case and kahneman and tversky s prospect utility we find that the transitional dynamics of optimal consumption paths differ distinctly from the standard model in particular consumption smoothing is more pronounced we also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital

hyperbolic discounting and endogenous growth this paper provides the closed form solution for the standard model of endogenous growth when consumers have present biased preferences and make time inconsistent savings plans which they revise continuously it is shown that long run growth is not necessarily lower under present biased preferences in fact a strong equivalence result holds if hyperbolic discounting provides the same present value of a constant infinite income stream as standard exponential discounting then the equilibrium rate of economic growth is also the same under both discounting methods in this sense present bias preferences are harmless for economic growth

persistence in industrial policy impacts evidence from depression era mississippi this paper studies the effects of a large scale industrial policy implemented in 1930s mississippi on contemporaneous and modern day labor market outcomes attracted by unprecedented government incentives under mississippi s balance agriculture with industry bawi program 13 large manufacturing plants established operations in the state between 1936 and 1940 using difference in differences and synthetic control matching techniques i find that counties that received these plants experienced an over 15 increase in female labor force participation on average in the short run moreover these effects persisted decades into the future well after many of the original companies shut down i also find suggestive evidence of an increase in educational attainment among women in counties where bawi investment occurred the results highlight the potential for even transitory government interventions to have long lived effects on labor markets

discount rate heterogeneity and social security reform abstract as many countries consider the privatization of existing pay as you go social security systems the option to make participation in the new system voluntary may appeal to policy makers who need to obtain the political support of their workers a critical issue in evaluating such a reform and its economic consequences is the unobserved heterogeneity in households preferences for consumption this paper estimates the distribution of rates of time preference from the wealth data in the survey of consumer finances 1992 and a flexible life cycle model of consumption under income uncertainty the estimated distribution is then applied to a variety of reform proposals that incorporate a voluntary choice of how much to contribute to a dedicated retirement account and a rebate of the existing payroll tax that increases with the magnitude of the contribution the main finding is that an appropriate menu of reform plans can induce the voluntary buy out of 84 of existing payroll taxes at an immediate cost to national saving of less than 0 25 percentage point

identifying the local economic development effects of million dollar facilities presented on february 22 2013 from 12 35 pm 2 00 pm in the architecture east building room 217 on the georgia tech campus

on the existence of balanced growth equilibrium the authors characterize the class of dynamic models that allow for the most commonly used types of sustained economic growth balanced and asymptotically balanced they show that under a constant returns to scale technology asymptotically constant discount rate and asymptotically constant elasticity of marginal felicity are not only necessary but also sufficient conditions for the existence of a n asymptotically balanced growth equilibrium path the authors provide examples of recursive utility models that accept a n asymptotically balanced growth equilibrium and discuss their implications on cross country differences in growth rates as well as on savings behavior and wealth distribution copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

industrial blackmail dynamic tax competition and public investment a dynamic model of intergovernmental competition for a large plant is presented when local productivity is uncertain one firm determines the location of its plant in each period by conducting an auction soliciting bids from local governments equilibrium subsidies from the local governments are derived the author also consider a two stage game where local governments first choose a level of costly infrastructure then participate in the sequential auction even when costs are identical across locations investing in different levels of infrastructure is a nash equilibrium moreover when infrastructure is endogenous in this manner it is chosen efficiently

firm location decisions regional grants and agglomeration externalities we examine whether discretionary government grants influence where domestic and multinational firms locate new plants and how the presence of agglomeration externalities interacts with these policy instruments we find that a region s existing industrial structure has an effect on the location of new entrants grants do have a small effect in attracting plants to specific geographic areas but importantly we find that firms are less responsive to government subsidies in areas where there are fewer existing plants in their industry this suggests that these subsidies are less effective in influencing firms location decisions in the face of countervailing co location benefits