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

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.