Competing for global capital or local voters? The politics of business location incentives

Abstract

The competition for global capital has led to interjurisdictional competition between countries, states and cities as to who can offer the most attractive incentives to firms. In this study, we examine the domestic politics of this competition by focusing on incentive use in the United States from 1999 to 2012. We define incentives as the targeted tax deductions or exemptions that are used to lure businesses into a locality. Drawing on data from municipal incentive programs, we examine how electoral competition shapes the use and oversight of targeted incentives. We find evidence that cities with elected mayors provide larger incentives than non-elected city managers by taking advantage of exogeneity in the assignment of city government institutions and a database of over 2000 investment incentives from 2010 to 2012. We also find that elected mayors enjoy more lax oversight of incentive projects than their appointed counterparts. Our results have important implications for the study of interjurisdictional competition and the role of electoral institutions in shaping economic policy.

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Notes

  1. 1.

    In the ICMA data, we observe a 75 % share of council-manager systems.

  2. 2.

    Many council-manager systems also have directly elected mayors, although they have considerably less power than mayors in mayor-council systems. To distinguish, we occasionally refer to directly elected mayors in a mayor-council system as “strong” mayors.

  3. 3.

    For work on foreign direct investment and agglomeration, see Barrell and Pain (1999) and Head et al. (1995, 1999).

  4. 4.

    We build on a larger literature in political science on the role of appointed versus elected politicians. For example, Huber and Gordon (2004) explore elected versus appointed judges, and Tavits (2009) examines the relationship between directly elected executives (presidents) versus appointed executives (prime ministers).

  5. 5.

    See also Caplan (2007).

  6. 6.

    A 2012 Gallup poll, for instance, asked respondents an opened-ended question, “In your view, what is the most important thing that can be done to improve the economy.” The first choice was create more jobs (named by 28 %), but the second choice was “Decrease taxes/improve tax breaks,” listed by 11 % of the sample (13 % Republican/10 % Democrat) (Newport 2012). Even more tellingly, in 2011 Gallup asked respondents what Obama could do to create jobs; 85 % favored “Providing tax cuts for small businesses, including incentives to hire workers,” and 73 % favored “Giving tax breaks to companies to hire people who have been unemployed for six months” (Newport 2011). On the question of attracting investment, 70 % of US respondents believed that tax incentives were a very important determinant of firm location choice (Ansolabehere 2010).

  7. 7.

    Hagan is far from the only official or pundit to use this terminology. For example, see Miller (2011, p. 288), the Orlando Sentinel (2009, no author listed) and Talton (2014).

  8. 8.

    For work that also examines the relationship between government form and local economic development, see Mason and Thomas (2010) and Sharp and Mullinix (2012).

  9. 9.

    See Feiock et al. (2003) for a thoughtful discussion of this literature. See Schiesl (1977) for a rich description of municipal reform from 1880 to 1920.

  10. 10.

    Rauch (1995) shows that these forms of government do have an impact on economic growth and infrastructure investment.

  11. 11.

    ICMA  data is copyrighted and its use is by permission.

  12. 12.

    In some cases, it was difficult to separate whether the incentive was provided by the municipality directly or was provided by the state government after consultation with the municipality. We treat these two situations as equivalent in the empirical analysis. Fortunately, including state incentives biases against the possibility of identifying differences between mayors and managers.

  13. 13.

    However, the results are substantively similar if we control for population in a standard regression specification or drop very small municipalities.

  14. 14.

    We replicate all results using ordinary least squares in Table A5 of the Online Appendix and include a number of additional robustness tests.

  15. 15.

    The coefficient sizes remain similar when the models are run separately by survey year, but they are estimated less efficiently because of the reduced statistical power.

  16. 16.

    Nelson (2011) creates an index of institutions that shape municipal government. We focus on this single instrument as outlined in Online Appendix 2. We thank her for sharing these data.

  17. 17.

    See Online Appendix Table A4 for entropy balancing descriptive statistics for these variables.

  18. 18.

    In Online Appendix Table A2, note that states with and without default clauses already differ very little on a range of reasonable covariates, including demographics, wealth, economic structure, government spending and political leanings.

  19. 19.

    However, we find no evidence of this in our empirical analysis.

  20. 20.

    Given the lack of comprehensive, historical municipal election data, we coded all municipalities with elections in 2014 as also having expected elections in 2012. Although this coding could introduce some measurement error, it is unlikely to bias our results.

  21. 21.

    See Model 7, Table A5 in Online Appendix.

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Acknowledgments

Thanks to Benjamin Crisman, Lillian Frost, Mi Jeong Shin and Kathryn Sproule for excellent research assistance and to Brady Baybeck, Adam Bonica, Randy Calvert, Jim Clinger, Bill Lowry, Gary Miller and Jessica Trounstine for comments and suggestions. Thanks to Kimberly Nelson for sharing her data with us. The Weidenbaum Center and Center for New Institutional Social Sciences at Washington University in St. Louis provided financial support for this project.

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Correspondence to Nathan M. Jensen.

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Jensen, N.M., Malesky, E.J. & Walsh, M. Competing for global capital or local voters? The politics of business location incentives. Public Choice 164, 331–356 (2015). https://doi.org/10.1007/s11127-015-0281-8

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Keywords

  • Incentives
  • Economic development
  • Pandering
  • Local government