Political connections and U.S. state government resource allocation effectiveness
The Journal of Law and Economics 67(3): 639-689
77 Pages Posted: 1 Mar 2018 Last revised: 26 Nov 2024
Date Written: March 01, 2024
Abstract
We find that U.S. state governments allocate economic incentive awards disproportionally to firms that are politically connected to state politicians, and that these political connections distort state government resource allocation effectiveness. A connected firm is more than three times more likely to receive an incentive award and the award amount is 51 percent larger. This relation is robust to unexpected gubernatorial departures and close gubernatorial elections where endogeneity is less of a concern. Importantly, unconnected firms that receive awards generate 1.5 to 2.0 times greater future jobs growth, and only awards to unconnected firms are associated with jobs spillover to other industries and long-run aggregate local economic growth. Connected awards are more likely and larger when politicians’ motives appear self-serving. Collectively these findings suggest that awarding economic incentives to politically connected firms are not an effective use of state taxpayer funds.
Keywords: government economic incentives, government resource allocation, corporate political connections, economic growth
JEL Classification: D72; H25; H71; M48
Suggested Citation: Suggested Citation