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Government Incentives and Firm Location Choices

State governments in the United States have been increasingly using business incentives such as grants and tax abatements to compete for firms. I examine the welfare consequences of this competition. I develop a model of state government competition and firm location choice combining a first-price auction among states with discrete choice by firms. I estimate this model using firm-level data on accepted incentives augmented with data on state attributes. To learn about state valuations for attracting firms and firms' geographic preferences, I exploit the first-order conditions for states' optimal bidding strategies and variation in firms' accepted offers and locations. I find that the effect of competition on overall welfare of states and firms is mostly zero, as firm location choices are relatively unresponsive to incentives, which become government transfers. States that are less profitable for firms without incentives tend to have higher valuations for firms but infrequently benefit from competition. My findings are consistent with the view that state government competition using incentives generates large corporate welfare and little allocative efficiency.