Benefits of subsidies to new businesses

Do cities offering generous subsidies to recruit businesses routinely get taken to the cleaners? A new study finds that on average, the cities that win contests to lure new businesses to their area by offering tax breaks, low-cost land, infrastructure and other handouts seem to benefit from the arrangement.

The study was conducted by economists Michael Greenstone of the Massachusetts Institute of Technology and Enrico Moretti of the University of California, USA. What makes their study different, and unusually compelling, is that they looked at cities that won competitions for location of manufacturing plants and carefully compared them with cities that made it to the final step of the selection process but just lost out.

Their results show that after the plant location decision was announced, the winning counties had faster payroll and job growth in that plant's industry than did the runner-up counties.

  • For example, total payroll increased by $100 million more in the winning counties, on average, in the six years after the announcement was made.

  • In other industries, however, there was not a detectable difference in job or payroll growth between the winning and losing counties.

  • In the eight years before the winning county was selected, the eventual winner and runner-up counties had about equal growth in employment and payrolls, both in the winning plant's industry and more generally.

    Still, Greenstone and Moretti are cautious about whether cross-city bidding for million-dollar plants is in America’s interest. They worry about an "arms race" in which bidding for plants does not increase national output because the plants would have located somewhere in the country anyway. They also note that the cities may benefit because state governments chip in money.

    Source: Alan B. Krueger, Study on Cities That Woo Industry, New York Times, December 11, 2003; based on Michael Greenstone and Enrico Moretti, Bidding for Industrial Plants: Does Winning a 'Million Dollar Plant' Increase Welfare? Working Paper 9844, National Bureau of Economic Research, July 2003.

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    FMF Policy Bulletin\23 December 2003

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