Thursday, September 04, 2014

Winner's Curse and The Nevada Payoff of Attracting the Tesla Factory

I have read that Tesla's new battery factory will open in the Greater Reno Nevada area.   As discussed by Tim Bartik more than 20 years ago, when a new factory opens up jobs (in this case 6000) are created. Most of the jobs go to people who move in to the area rather than to the local unemployed or to those out of the labor force.    Now the work by Greenstone, Moretti and Hornbeck would counter that there is a local multiplier effect such that the new firm creates increased demand for intermediate input suppliers and this further stimulates the economy. In the case of Tesla is this correct?  Tesla produces a very special product.  Will the Reno Economy (centered on gambling?) have an edge in producing specialized equipment to ship to the Tesla plant or will the Tesla plant be vertically integrated such that there is no multiplier effect from attracting this plant? I bet the answer is the second one.

Also don't forget Winner's Curse. When different bidders have diverse beliefs about the true value of an object. The most optimistic bidder wins the bidding but overpays as the average belief is a better measure of the true value of the object being bid on (in this case the Tesla plant).    Nevada is likely to regret this investment.  For me to reject this claim, I'd have to be convinced about some type of domino effect that by attracting Tesla that this will have a causal effect on raising the probability of attracting other green firms to locate there. I'm having trouble seeing how this chain of events will unfold.