The Department of Business and Management Science invites you to a brownbag seminar with Costanza Cincotta, NHH, Department of Business and Management Science.
We study the effect on competition of government economic development subsidies - a widely-used U.S. policy tool intended to stimulate economic growth and reduce economic disparities across regions. Subsidies lower subsidized firms’ costs to deploy their competitive strategies, potentially leading to negative externalities for non-subsidized firms. Using a novel dataset that tracks U.S. federal, state, and local government subsidies to U.S. publicly traded firms, we predict and find evidence consistent with government economic development subsidies negatively impacting non-subsidized firms’ market share and financial performance.
These findings are driven by U.S. non-federal subsidies. When non-federal subsidies are smaller, non-subsidized firms lose market share but do not experience a decline in financial performance. Larger non-federal subsidies are driving the negative economic impact on non-subsidized firms’ financial performance in the form of lower sales and higher costs of doing business, resulting in lower operating income.
In line with these results, we find an increase in the number of firms exiting the market after a firm in the same state and industry receives a large government economic development subsidy. No effect, however, is detected when looking at firm entry rate. These findings highlight a previously unexplored negative externality that government economic development subsidies can have on the competitive environment.