Do Governments respond to agglomeration economies? Evidence from regional grants in Great Britain

Event Date: 12 February 2014

Speaker: Marius Brulhart, University of Laussane

Abstract
We examine whether governments take account of agglomeration economies as predicted by models of economic geography. Specifically, we study the generosity of governments in allocating firm-specific subsidies which aim to create jobs in economically lagging regions.

Using 20 years’ of administrative data on regional assistance grant applications and offers matched to information on the universe of firms in Great Britain, we test the hypothesis that in the magnitude of their offers, governments internalise the fact that firms in more agglomerated industries will be less sensitive to financial inducements.

We find that firms appear to internalise the existence of localization benefits in their grant applications to government, and that government agencies also reflect this in the generosity of their subsidy offers. However, we also find some evidence that the government may actually be structuring their offers so as to try and preserve existing employment in more agglomerated industries in areas with a higher percentage of industry employment.

Published: 11 February 2015