Pass the Bucks: Credit, Blame, and the Global Competition for Investment

Abstract

Both countries and subnational governments commonly engage in competition for mobile capital, offering generous incentives to attract investment. Existing economics research has suggested that these tax incentives have a limited ability to affect investment patterns and are often excessively costly when measured against the amount of investment and jobs created. In this paper, we argue instead that the “competition” for capital can be politically beneficial to incumbent politicians. Building off work on electoral pandering, we argue that incentives allow politicians to take credit for firms' investment decisions. We test the empirical implications of this theory using a nationwide Internet survey, which employs a randomized experiment to test how voters evaluate the performance of incumbent US governors. Our findings illustrate a critical political benefit of offering such incentives. Politicians can use these incentives to take credit for investment flowing into their districts and to minimize the political fallout when investors choose to locate elsewhere.

Fiscal decentralization and tax incentives in the developing world

“…According to Jensen et al (2014), voters often reward local politicians who offer tax incentives to attract investment and promote local development, and at the same time, voters do not necessarily penalize the politicians for ineffective incentives. The authors conduct an internet survey experiment that asks voters to evaluate incumbent US governors 6 REVIEW OF INTERNATIONAL POLITICAL ECONOMY and find supporting evidence.…”

“…By offering tax incentives, local politicians can claim credit for firms' investments into their jurisdictions, regardless of whether those programs work or not (Jensen et al 2014). In addition, politicians can use tax incentives to reward political supporters and themselves (Easter 2008;James 2013).…”

“…They focus on the competition among national governments for growingly mobile foreign capital (Guisinger 1985;Klemm 2009;Stopford and Strange 1991;Thomas 2000), the ability to afford tax holidays (Bond and Samuelson 1986), the credibility deficit due to poor economic conditions or rule of law in many developing countries (Janeba 2002;Li 2006;Lim 1983;Shah and Toye 1978), the role of democratic political institutions (Jensen 2013;Li 2006;Li and Resnick 2003), and the credit-claiming incentive of local politicians (Jensen, Malesky, Medina, and Ozdemir 2014). These studies, however, have overlooked the fact that many countries have decentralized fiscal authority, authorizing subnational governments to set tax policies and offer tax incentives.…”

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

“…This credit claiming is most easily achieved when spending is "visible and easily targeted" (de Haan and Klomp 2013, 389). Jensen et al (2014) argue that economic development incentives can be an effective mechanism for credit claiming or blame avoidance, where a politician can take credit for investment that was coming into her district by offering an incentive, linking a concrete government policy to an individual investment. These incentives, and the jobs "created" by these incentives, are touted on governors' websites and are part of press releases.…”

Political Economy of Foreign Direct Investment: Globalized Production in the Twenty-First Century

“…A handful of studies consider policy makers' motives to use these costly yet largely ineffective policies. Jensen et al (2014) propose FDI incentives give voters the illusion that policy makers are proactively trying to stimulate economic growth. In an online survey experiment, the authors show subjects are more likely to support US state governors who offer tax incentives to foreign investors.…”