Shops and the City: Evidence on Local Externalities and Local Government Policy from Big-Box Bankruptcies

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We report three findings: (1) Using evidence from national chain bankruptcies and a data set on 12-18 million establishments per year, we show that large retailers have significant positive effects on nearby establishments that decay quickly with distance. (2) Local governments respond to the size of these externalities. When a town’s political boundaries allow it to capture a larger share of retail spillovers, it is more likely to offer retail subsidies. (3) These subsidies, however, crowd out private-sector mechanisms that also subsidize large retailers, such as shopping malls. Together these facts provide powerful evidence of the Coase theorem at work and highlight a concern for local development policies even when externalities can be targeted. 

Last updated on 05/02/2017