Local Growth Policy and Dynamic Misallocation

Many state and local governments incentivize new business creation. I analyze local growth policy in a setting where firm entry and expansion choices exhibit local complementarities, creating dynamic misallocation at the aggregate level. Optimal entry subsidies would speed the transition of Rust-belt workers to the South and Mountain West by an extra 10 million people by 2035, raising real incomes by 4%. Actual subsidies substantially worsen misallocation, lowering welfare by 3%, 6 times the size of the subsidies themselves.