The Political Economy of State-Provided Targeted Benefits

39 Pages Posted: 31 May 2014 Last revised: 5 Sep 2014

Christopher J. Coyne

George Mason University - Department of Economics

Lotta Moberg

William Blair

Date Written: May 30, 2014

Abstract

The governments of American states often attempt to incentivize businesses to locate within their borders by offering targeted benefits to particular industries and companies. These benefits come in many forms, including business tax credits for investments, property tax abatements, and reductions in the sales tax. Despite good intentions, policymakers often overlook the unseen and unintended negative consequences of targeted-benefit policies. This paper analyzes two major downsides of these policies: (1) they lead to a misallocation of resources, and (2) they encourage rent-seeking and thus cronyism. We argue that these costs, which are often longer-term and not readily observable at the time the targeted benefits are granted, may very well outweigh any possible short-term economic benefits.

Keywords: target benefits, economic calculation, cronyism

JEL Classification: H1, H2, H3, P16

Suggested Citation

Coyne, Christopher J. and Moberg, Lotta, The Political Economy of State-Provided Targeted Benefits (May 30, 2014). GMU Working Paper in Economics No. 14-18. Available at SSRN: https://ssrn.com/abstract=2443816 or http://dx.doi.org/10.2139/ssrn.2443816

Christopher J. Coyne (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

Lotta Moberg

William Blair ( email )

Chicago, IL
United States
+13123645011 (Phone)

HOME PAGE: http://https://www.williamblairfunds.com/macro/

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