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

See all articles by Daniel Aobdia

Daniel Aobdia

Pennsylvania State University - Smeal College of Business

Allison Koester

Georgetown University - Department of Accounting and Business Law; Georgetown University - McDonough School of Business

Reining Petacchi

Georgetown University - Department of Accounting and Business Law

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

Aobdia, Daniel and Koester, Allison and Petacchi, Reining, Political connections and U.S. state government resource allocation effectiveness (March 01, 2024). The Journal of Law and Economics 67(3): 639-689, Available at SSRN: https://ssrn.com/abstract=3127038 or http://dx.doi.org/10.2139/ssrn.3127038

Daniel Aobdia

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

Allison Koester

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202.687.6461 (Phone)

HOME PAGE: http://explore.georgetown.edu/people/apk29/

Reining Petacchi (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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