Economic spillovers and political payoffs in government competition for firms: Evidence from the Kansas City Border War

Abstract

When jurisdictions use business incentives to compete for firms, the political payoffs of winning firms are privately derived by the politicians of the winning jurisdictions, but the economic payoffs, such as new jobs, can spill over to the residents of non-winning jurisdictions. I study how potential political payoffs shape government competition for firms using a simple model of government competition and firm location choice. I use the model to propose an empirical approach of deriving lower bounds on political payoffs with data on accepted incentives. Applying this approach to the recent state competition between Kansas and Missouri for firm relocation within Kansas City, I find that the two states derived sizable political payoffs.