Essays on regional and public economics

Abstract

This dissertation examines how public spending is allocated to private firms and how fiscal incentives shape this allocation, with a particular focus on spatial patterns. While public economics traditionally emphasizes the size and financing of government spending, comparatively little attention has been paid to how funds are distributed across firms and regions. This dissertation addresses this gap by analyzing two major channels of public spending: public procurement and R&D subsidies. The first chapter studies spatial allocation patterns in European public procurement and documents a home bias. Using a trilateral gravity framework that incorporates the contracting authority, the winning firm, and the place of performance, the analysis shows that from the firm-perspective, proximity to the contracting authority is more important than proximity to the place of performance. This suggests that institutional proximity, social ties, or local favoritism play a larger role than standard trade or transport costs, indicating limited market integration in EU procurement. The second chapter investigates a potential mechanism underlying this localization by focusing on local business taxation in Germany. It shows that municipalities have fiscal incentives to award contracts to local firms, as this increases their tax base. Using a control function approach based on exogenous variation from the German census shock, the results demonstrate that higher local business tax rates lead to a significantly higher share of locally awarded contracts. The third chapter analyzes the effectiveness of public R&D funding at the firm level. Combining administrative funding data with firm-level data, it uses matching on the firm-level and the cluster level. It finds positive direct and indirect effects on fixed assets, the number of employees and quality-adjusted patents. In particular, the results highlight substantial spillover effects within regional clusters, which exceed the direct effects on subsidized firms. Overall, the dissertation provides new empirical evidence on the allocation and effectiveness of public spending. It highlights the importance of local fiscal incentives and institutional factors in shaping allocation decisions and points to potential trade-offs between decentralized policy-making and broader objectives such as market integration and efficiency.