Should governments offer subsidies to attract businesses?

Emily Lambert | Feb 28, 2019

Sections Economics Public Policy

Collections IGM Poll

When Amazon announced in 2017 that it was shopping for a location for a second North American headquarters, cities across the United States, Mexico, and Canada, offered up sweeteners. An economic development company sent the online retailer a 21-foot saguaro cactus to try to entice Amazon to Tucson, Arizona. Hundreds of other cities offered tax breaks, infrastructure improvements, and other temptations. 

In November 2018, Amazon announced it had chosen Virginia and New York—and quickly found itself facing a backlash. In Queens, critics included elected officials who questioned, among other things, why the company should be given hundreds of millions of dollars in tax breaks at a time when city services were starved for investment. In February, Amazon cancelled its plans to build in the borough—and left many people arguing about whether the subsidies New York had offered would have paid off for the area, or just the company.

The primary winners of such “beauty contests” are likely to be the companies themselves, rather than the chosen locations, according to a survey of prominent economists. Chicago Booth’s Initiative on Global Markets put a general question to its US Economic Experts Panel, asking who typically captures most of the value when areas offer subsidies to compete to bring a company to town. Almost half of the respondents said companies capture most of the value, and the results were even stronger when weighted by respondents’ confidence. But when asked if a federal rule prohibiting such subsidy competitions would improve welfare for the average taxpayer, the results were more mixed. 

Michael Greenstone, University of Chicago
“When subsidies tend to be largest, there are substantial benefits for firms who were there before new plant—i.e., productivity spillovers.”
Response: Disagree

Caroline Hoxby, Stanford
“The best recent evidence on this question, which is well identified and can be interpreted as causal, suggests that the answer is yes.”
Response: Agree

Richard H. Thaler, Chicago Booth
“Probably true. Winner’s curse hurts the bidders. But nothing says the firm gets all the rents.”
Response: Uncertain

Barry Eichengreen, University of California at Berkeley
“‘Captures most’ doesn’t mean ‘captures all,’ so going as far as a prohibition makes me queasy.”
Response: Uncertain

Kenneth Judd, Stanford
“How can a law define ‘shopping’? Cities subsidize stadiums because the team MIGHT get offers. Better to fix municipal-bond-tax rules.”
Response: Disagree

Emmanuel Saez, UC Berkeley
“Tax subsidies for business relocation is an aggressive form of tax competition that ought to be regulated by the central government.”
Response: Strongly agree