Association for Public Policy Analysis & Management

There are few situations where an externality can be identified in a dataset, fewer where the relative size of this externality can be correlated with policy decisions, and fewer still where these decisions can be explored alongside alternative private internalization systems. In this paper, we study precisely such externalities, policies, and private mechanisms. We report three findings: (1) Using evidence from chain bankruptcies and data on 12-18 million establishments per year, we show that large retailers produce significant positive spillovers. (2) Local governments respond to the size of these externalities. When a town’s boundaries allow it to capture a larger share of retail spillovers, it is more likely to offer retail subsidies. (3) These subsidies partially crowd out private-sector mechanisms that also subsidize large retailers, such as shopping malls. 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.