Bidding for Industrial Plants: Does Winning a 'Million Dollar Plant' Increase Welfare?

58 Pages Posted: 20 Nov 2004

See all articles by Michael Greenstone

Michael Greenstone

University of Chicago - Department of Economics; Becker Friedman Institute for Economics; National Bureau of Economic Research (NBER)

Enrico Moretti

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

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Date Written: November 2004

Abstract

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. 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 Classification: R0, R3, R5, H2, H7, J0, J6

Suggested Citation

Greenstone, Michael and Moretti, Enrico, Bidding for Industrial Plants: Does Winning a 'Million Dollar Plant' Increase Welfare? (November 2004). MIT Department of Economics Working Paper No. 04-39. Available at SSRN: https://ssrn.com/abstract=623122 or http://dx.doi.org/10.2139/ssrn.623122

Michael Greenstone (Contact Author)

University of Chicago - Department of Economics

1126 East 59th Street
Chicago, IL 60637
United States

Becker Friedman Institute for Economics ( email )

Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Enrico Moretti

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://emlab.berkeley.edu/~moretti/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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