How Do Establishments Choose Their Location? Taxes, Monopsony, and Productivity

To study the distribution of economic activity across space and place-based policies, I develop a model of the location choice of new establishments incorporating monopsonistic labor markets, taxes, and spillovers. Estimates using German administrative data indicate that establishments prefer lower taxes and lower worker outside options which enable establishments to pay lower wages. The degree to which various types of productivity spillovers matter in the location decision varies between industries. I also quantify the effects of a counterfactual place-based policy and find that the response of a commuting zone to the place-based policy depends on the degree of labor market power in that commuting zone. More monopsonistic labor markets receive more benefit from the place-based policy.