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Subsidy Bidding Wars and the Structure of Multi-Plant Firms

Author

Listed:
  • Lapointe, Simon
  • Morand, Pierre-Henri

Abstract

Governments spend large amounts of money to attract firms to their territory, often resulting from bidding wars against other regions. Previous papers show that such bidding wars can improve social welfare by allocating the investment to the regions that value it the most. In this paper, we depart from the usual assumption of exogenous, single-plant investment. We show that in this context, bidding wars incite the firm to allocate its investment strategically, by investing more and differentiating the plants. In turn, the firm receives larger subsidies. Despite these distortions, bidding wars may remain socially optimal, as in simpler models.

Suggested Citation

  • Lapointe, Simon & Morand, Pierre-Henri, 2019. "Subsidy Bidding Wars and the Structure of Multi-Plant Firms," Working Papers 115, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:115
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    File URL: https://www.doria.fi/handle/10024/166937
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    References listed on IDEAS

    as
    1. Mathias Dewatripont & Paul Seabright, 2006. ""Wasteful" Public Spending and State Aid Control," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 513-522, 04-05.
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    7. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-1256, December.
    8. Pedro P. Barros & Luís Cabral, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-371, May.
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    13. Adams, Brian, 2016. "The employment impact of motor vehicle assembly plant openings," Regional Science and Urban Economics, Elsevier, vol. 58(C), pages 57-70.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    subsidies; regional governments; bidding wars; multi-establishment firms; auctions; Local public finance and provision of public services; Business regulation and international economics; D44; H71; H25; D21; L23; Elinkeinopolitiikka;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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