Degree Name

Department

Economics

College

Family, Home, and Social Sciences

Publication Date

2023-08-02

First Faculty Advisor

Jaren Pope

First Faculty Reader

David Simpson

Honors Coordinator

John Stovall

Keywords

Costco, Synthetic Control, Difference in Differences, City Planning, Economic Development, Urban Sprawl, Urbanization

Abstract

Costco stores have significant economic implications for smaller cities, often becoming pivotal points in their development. These cities eagerly invite Costco to establish stores within their borders, offering substantial financial incentives to facilitate this growth. The effects of a new Costco store can be diverse, impacting local municipalities in both positive and negative ways. This study focuses on two key aspects: changes in sales tax revenue and property values, keeping in mind the agglomeration[1] effects that Costcos bring about.

I examine three Utah cities to estimate the impact on taxable sales and analyzes Costco's influence on residential property values in Sacramento and Orange counties, California. Utilizing a synthetic control strategy, the study reveals a notable increase in sales tax revenue, measured as a percentage of taxable sales. However, employing a difference in differences strategy, I do not find a significant effect on single-family property values.

Combining these findings, I consider a city's incentive package as an investment and evaluates the timeframe required for the economic effects of Costco, as well as the subsequent growth of local businesses, to recoup the initial incentives. Based on the analysis of Spanish Fork, a midsized city in Utah, it is estimated that a Costco store can pay for itself in five years or less. This indicates the importance and potential benefits of enticing Costco to these communities.

A central tenant to urban economics, agglomeration economics, captures the idea that when firms are located near one another, they experience increased efficiency. Some firms use this to their advantage, locating a near a Costco, creating a hub of commerce where consumers can choose from a wider selection of goods and services. While the impact of Costco is technically different from that of the agglomeration of following businesses they cannot here be disentangled. Therefore, when I refer to the effect of Costco, for the purposes of this paper, I mean the effect of Costco and the following agglomeration of businesses.