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.

Electoral Institutions and Electoral Cycles in Investment Incentives: A Field Experiment on Over 3,000 U.S. Municipalities*

“…Mayors are directly elected by voters, which leads to direct electoral pressures on them (Vlaicu and Whalley 2016). Previous research argues that mayor-council governments provide larger incentives (in dollar terms), and this is made possible by the weaker oversight of these programs (Jensen, Malesky, and Walsh 2015). Mayors dramatically "overpay" for incentives.…”

The Location of Superstores in Italy: A Metric Approach

“…Results suggests that state level tax policies can affect the entrepreneur's decision to realize a certain level of business location. (Jensen, et al, 2015) analyses the possibility of using business location as a way to realize a competition between two countries. Authors analyze domestic politics in the United States during the period 1999-2012.…”

“…(Jensen, et al, 2015) analyze the role of tax deduction and exemption to increase the possibility of a firm to locate a business in a certain locality. (Jensen, et al, 2015) have analyzed data from different municipal programs, examining the way in which electoral competition can shape public domain incentive to business location. Authors analyze the role of incentive in the process of building political and economic programs.…”

Political hazards and firms' geographic concentration

“…By leveraging its geographic diversification, a firm operating in different regions has greater arbitrage opportunities to reduce the overall hazard of state expropriation that it experiences from multiple host country governments. This mechanism also holds for the analysis of local governments within the same country (for a study of municipal competition within the United States, see Jensen, Malesky, and Walsh, ) . Therefore, the advantages of mobility and flexibility associated with a firm's operations outside of a single location constitute a boundary condition for government expropriation, in that the local government faces the risk of extracting so much revenue from such a firm that it shuts down operations and leaves the locality.…”