Bidding for industrial plants
Subtitle: does winning a "million dollar plant" increase welfare?
By: Michael Greenstone [an] Enrico Moretti
Contributors: Moretti, Enrico; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-39; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-39.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Number of pages: 36
Subjects: Subsidies; Industrial promotion
Description: Increasingly, local governments compete by offering substantial subsidies to industrial plants to locate within their jurisdictions. This paper uses a novel research design to estimate the local consequences of successfully bidding for an industrial plant, relative to bidding and losing, on labor earnings, public finances, and property values. Each issue of the corporate real estate journal Site Selection includes an article titled The Million Dollar Plant that reports the county where a large plant chose to locate (i.e., the 'winner'), as well as the one or two runner-up counties (i.e., the 'losers'). We use these revealed rankings of profit-maximizing firms to form a counterfactual for what would have happened in the winning counties in the absence of the plant opening. We find that the plant opening announcement is associated with a 1.5% trend break in labor earnings in the new plant's industry in winning counties, as well as increased earnings in the same industry in counties that neighbor the winner. Further, there is modest evidence of increased expenditures for local services, such as public education. Property values may provide a summary measure of the net change in welfare, because the costs and benefits of attracting a plant should be capitalized into the price of land. If the winners and losers are homogeneous, a simple model suggests that any rents should be bid away. We find a positive, relative trend break of approximately 1.1-1.7% in property values.

(cont.) Since the winners and losers have similar observables in advance of the opening announcement, the property value results may be explained by heterogeneity in subsidies from higher levels of government (e.g., states) and/or systematic underbidding. Overall, the results undermine the popular view that the provision of local subsidies to attract large industrial plants reduces local residents' welfare. Keywords: firm location, regional development policy, business subsidies, labor demand. JEL Classifications: R0, R3, R5, H2, H7, J0, J6.
Notes: "November 2004."

Includes bibliographical references (p. 32-34).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.