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...sider five of the most relevant market 19 imperfections and their implications for place based policies. 3.1 Local Public Goods Pure public goods will tend to be under-provided by the private sector (=-=Bergstrom, Blume, and Varian, 1986-=-). Hence, a key role of local governments is to provide core public services in the areas of health, safety, and infrastructure that raise the utility of local residents (see Glaeser, 2013 for a revie...

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...e worker utility given optimal location choices can be written: V ≡ Emax{Uia, Uib} = s log(exp(va/s) + exp(vb/s)) (18) which follows from standard results on the inclusive value of Logit models (e.g. =-=McFadden, 1978-=-; Rust, 1987). Moretti (2011)). If lower skilled workers are predominately located in city b and are not particularly mobile, then there may be an equity argument for targeting transfers to this commu...

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... given optimal location choices can be written: V ≡ Emax{Uia, Uib} = s log(exp(va/s) + exp(vb/s)) (18) which follows from standard results on the inclusive value of Logit models (e.g. McFadden, 1978; =-=Rust, 1987-=-). Moretti (2011)). If lower skilled workers are predominately located in city b and are not particularly mobile, then there may be an equity argument for targeting transfers to this community. 17More...

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...lly have an efficiency rationale.36 Hiring costs are not the only sort of cost that can adversely influence the wage bargain and distort job creation. Another example is the presence of firing costs (=-=Lazear, 1990-=-; Bertola, 1990; Kugler and Saint-Paul, 2004; Hafstead, 2012). Although firing costs can be substantial in many European and developing countries, they have been understudied empirically. Their implic...

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...es of this type can potentially explain GDP differences between countries. Alternatively, spillovers from education may arise through search externalities or endogenous skill-biased technical change (=-=Acemoglu, 1996-=-, 1998). In the context of our model, equation (23) could be augmented so that the productivity 31An alternative rationale that has been proposed for subsidies to attract new firms – and especially he...

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...cy.30 In practice, maintaining credibility is difficult and governments likely need to commit “seed money” in order persuade other parties to risk the negative consequences of a coordination failure (=-=Andreoni, 1998-=-). However it does seem realistic to think that in the presence of multiple equilibria, expectations together with the actual provision of subsidies might play a non-trivial role in the process of loc...

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...ficiency rationale.36 Hiring costs are not the only sort of cost that can adversely influence the wage bargain and distort job creation. Another example is the presence of firing costs (Lazear, 1990; =-=Bertola, 1990-=-; Kugler and Saint-Paul, 2004; Hafstead, 2012). Although firing costs can be substantial in many European and developing countries, they have been understudied empirically. Their implications for plac...

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...ect an understanding that labor markets do not always function efficiently. One possible source of inefficiency is hiring costs, which have been shown to be empirically important for hiring behavior (=-=Hamermesh, 1989-=-; Bloom, 2009). Kline and Moretti (2013) study the role of place based policies in offsetting hiring costs using a variant of the heavily studied Diamond (1982) - Mortensen (1982) - Pissarides (1985) ...

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...investment and new employers, making the policies themselves endogenous.22 Bidding contests of this type can be thought of as auctions where multiple buyers offer bids to a limited number of sellers (=-=Greenstone and Moretti, 2004-=-). Competition among localities implies that some of the incidence of local subsidies shifts away from workers and landowners to firms. To see this, consider the case of a firm trying to decide where ...

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...ale.36 Hiring costs are not the only sort of cost that can adversely influence the wage bargain and distort job creation. Another example is the presence of firing costs (Lazear, 1990; Bertola, 1990; =-=Kugler and Saint-Paul, 2004-=-; Hafstead, 2012). Although firing costs can be substantial in many European and developing countries, they have been understudied empirically. Their implications for place based policies are an impor...

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...ing that labor markets do not always function efficiently. One possible source of inefficiency is hiring costs, which have been shown to be empirically important for hiring behavior (Hamermesh, 1989; =-=Bloom, 2009-=-). Kline and Moretti (2013) study the role of place based policies in offsetting hiring costs using a variant of the heavily studied Diamond (1982) - Mortensen (1982) - Pissarides (1985) matching fram...

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...sful tech clusters. 47Particular attention should be given to evaluating programs that seek to build high tech clusters, an increasingly popular form of place based policy in the U.S. and abroad. 33 (=-=Albouy, 2009-=-) and the existence of important labor market rigidities can justify offsetting spatially targeted policies. In an ideal world, efficiency would be achieved by directly removing existing distortions. ...

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...y. Explanations for agglomeration economies of this sort include technological externalities that may arise through social interactions and learning (Black and Henderson, 1999; Glaeser 1999 and 2001; =-=Moretti, 2004a-=- and 2004b; Henderson, 2008; Greenstone, Hornbeck and Moretti, 2010) or through thick market effects either in the labor market or the intermediate input market (Marshall, 1890).27 In the context of t...

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...Zones.” These programs originated in the U.K. during the Thatcher administration as a way of revitalizing declining urban industrial neighborhoods through tax abatements and reductions in regulation (=-=Rubin and Richards, 1992-=-). Shortly afterwards, many U.S. states adopted similar programs offering investment and wage subsidies for firms locating within Zone boundaries. California, for instance, has 42 Enterprise Zones, co...

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... intervention, as the welfare benefits of equilibrium selection can easily trump the efficiency costs of distorting prices, which are typically second order small in the absence of prior distortions (=-=Harberger, 1964-=-).28 Figure 4: Equilibrium with Agglomeration 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 −3 −2 −1 0 1 2 3 Fraction in city a sΛ−1(N a ) v as− vb (τa=0) v as− vb (τa=.25) Consider, for example, how Figure...

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...retti, 2013). These geographical differences in labor market outcomes are persistent across decades (Blanchard and Katz, 1992; Barro and Sala-i-Martin, 1992) and, strikingly, even across generations (=-=Chetty et al., 2013-=-). As Robert Lucas (1988) famously remarked about international differences in economic development “I do not see how one can look at figures like these without seeing them as representing possibiliti...

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...et resources towards particular areas or regions date back to antiquity – it is well known for example that taxes were used to subsidize the citizens of Rome at the expense of the rest of the Empire (=-=Rostovtzeff, 1929-=-). However it is only more recently that national governments have sought to encourage economic development in lagging regions, cities, or neighborhoods with explicit place based development programs....

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... average worker utility is slightly lower and landlord profits are slightly higher. The resulting decrease in total social welfare is the standard deadweight loss familiar from the study of taxation (=-=Auerbach and Hines, 2002-=-). Figure 3: Worker Utility by City 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 −0.8 −0.6 −0.4 −0.2 0 0.2 0.4 0.6 0.8 Λ ( e i b−e i a s ) Utility in a (τ a =0) Utility in b (τ a =0) Utility in a (τ a =.25...

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... to fund generous business subsidies and public investments in regions with low nominal income and high unemployment. For the period 2007-2013, the fund amounts to 49 billion Euros per year (European =-=Commission, 2013-=-), or roughly four times the total amount spent by the U.S. federal government.3 National governments in Europe have also eagerly embraced these policies. Since the 1970’s, the main business support s...

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...h the same real income pay higher federal 42Shiller and Weiss (1999) discuss various approaches to the creation of home equity insurance markets but these ideas have not yet seen widespread adoption (=-=Goetzmann et al, 2003-=-). 43Particularly in the presence of credit constraints, behavioral responses are not per se a sign of inefficiency. See for example the arguments in Chetty (2008). 44Judiciously chosen minimum wages ...

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...nsation from payroll tax through the city. Both measures where designed to retain high tech companies within the city jurisdiction. In 2011, the payroll-tax revenue forgone amounted to $2.8 million. (=-=Letzing, 2012-=-) 17 a new establishment, and a large number of counties trying to lure it to their jurisdiction. Assume that the entire cost of the subsidy is paid for by the winning county. The value to a county of...

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...l dispersion in unemployment rates is wider than the variation in national unemployment rates observed over most business cycles (Kline and Moretti, 2013) and is remarkably persistent across decades (=-=Rappaport, 2012-=-) The model of Section 2 assumed that labor markets clear instantly and generate full employment. This led to the conclusion that distorting wages with a subsidy necessarily generates an efficiency co...

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...on choices can be written: V ≡ Emax{Uia, Uib} = s log(exp(va/s) + exp(vb/s)) (18) which follows from standard results on the inclusive value of Logit models (e.g. McFadden, 1978; Rust, 1987). Moretti =-=(2011)-=-). If lower skilled workers are predominately located in city b and are not particularly mobile, then there may be an equity argument for targeting transfers to this community. 17More precisely, the a...

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...on choices can be written: V ≡ Emax{Uia, Uib} = s log(exp(va/s) + exp(vb/s)) (18) which follows from standard results on the inclusive value of Logit models (e.g. McFadden, 1978; Rust, 1987). Moretti =-=(2011)-=-). If lower skilled workers are predominately located in city b and are not particularly mobile, then there may be an equity argument for targeting transfers to this community. 17More precisely, the a...