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Large retailers have significant positive spillovers on nearby businesses, and both private and public mechanisms exist to attract them. We estimate these externalities using detailed geographic establishment data and exogenous variation from national chain bankruptcies. We show that local government policy responds to the size of these spillovers. When political boundaries allow local governments to capture more of the gains from these large stores, governments are more likely to provide retail subsidies. However, these public incentives also crowd out private mechanisms that subsidize these stores and internalize their benefits. On net, we find no evidence that government subsidies affect the efficiency of these large retailers’ location choice as measured by the size of the externalities at a given distance, rather than within a certain border.

Local Governments and Retail Externalities

In a recent ICMA survey (ICMA, 2009), forty percent of local governments in the United States reported focusing on retail incentives to spur economic development. Be it through tax increment financing, income and property tax credits, land use subsidies, sales tax rebates, infrastructure assistance, or any of a myriad of other mechanisms, the goal is the same: to make it more attractive for large retailers to set up shop in town. One justification for these development efforts is the notion that these retailers produce positive externalities for the existing local businesses and promote the arrival of new businesses, increasing municipal tax collection and employment. In this paper, we estimate the size of the externalities produced by big-box retail stores for other establishments and explore the effect of the externalities on local government policy. To produce our estimates, we exploit the nation-wide store closings associated with the bankruptcies of national chains of bookstores (Borders), department stores (Mervyn’s), electronics stores (Circuit City Stores and CompUSA), and housewares stores (Linens ‘n Things). We contrast the sudden disappearance of the stores affiliated with these chains with the continuing presence of stores associated with comparable competitor chains in the same sectors (Barnes & Noble, Kohl’s, Best Buy, and Bed Bath and Beyond). Using geographically detailed establishment data, we find robust, postive spillovers at the short distances relevant for municipalities.

We then gauge whether it is indeed those local governments that face the largest positive externalities which undertake the most aggressive development policies. We test this hypothesis using data on the geographical shape of localities, under the assumption that local governments care disproportionately about economic activities within their borders. We find that when the geographical shape of the locality makes it more likely that positive spillovers will be contained within city boundaries, those cities are more likely to emphasize retail development. Cities less likely to benefit from these externalities are more restrained in their retail focus. Interestingly, the private sector (partially) makes up for this restraint through the construction of shopping centers and malls, suggesting that public development subsidies tend to crowd out private ones. In these shopping malls, the big-box “anchor” stores typically receive rent discounts (see Gould and Pashinigan 2005), subsidized by the neighboring stores. We provide a simple model of competitive local governments to rationalize these findings.

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