Political Connections and Government-Awarded Economic Incentives: State-level Evidence
77 Pages Posted: 1 Mar 2018 Last revised: 4 Dec 2018
Date Written: December 1, 2018
This paper examines whether corporate political connections are associated with state government-awarded corporate economic incentives, and whether an association is cause for constituent concern. Economic incentives are predominantly in the form of tax credits, rebates, and abatements. We test our research questions using a novel dataset of more than 1,000 publicly traded companies awarded at least one state-level economic incentive during a 15-year time period (2000 through 2014). We find that politically connected companies are nearly four times more likely to receive an incentive award. When these politically connected companies receive an award, the incentive is nearly fifty percent more valuable. The positive association between political connections and economic incentive awards is stronger when the connected company has closer ties to a state legislative party vulnerable to losing its majority position, and when state political corruption is greatest. We also find evidence that county-level future economic growth is greater when incentives are awarded to politically unconnected companies. Thus, our analyses indicate that taxpayer funds are disproportionately awarded to politically connected companies, even though these awards are a less effective use of taxpayer funds.
Keywords: government subsidies, corporate political connections, quid pro quo
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