Political Motives in US Industrial Subsidy Distribution: A Firm-Level Analysis

• In Event: U.S. Trade Politics

Abstract

The distribution of industrial policy benefits by governments among firms is unequal, leading to questions about the allocation criteria for subsidies and tax incentives. In an increasingly global economy, governments often favor firms that are less likely to leak benefits to foreign entities to optimize political gains from domestic constituencies. This study examines firm-level factors, such as nationality, supply chain, customer base, and workforce location, to understand the externalities of industrial policy. It also suggests the moderating effect of government partisanship on subsidy allocation; Republican-led states might give more subsidies to domestic firms with domestic supply chains, catering to business interests, whereas Democratic-led states might emphasize the benefits for workers and consumers and support firms employing more from local and selling to local. Using data from the Subsidy Tracker database, which includes over 669,937 subsidies from various levels of the U.S. government from 1966 to 2023, and several firm-level datasets, this research illuminates the complex factors that shape industrial policy decisions. This paper provides valuable insights into the industrial policy debate by analyzing the interplay between political objectives and firm-specific characteristics.

Author

• Sujin Cha, University of Michigan