The Effects of State and Local Economic Incentives on Business Start-Ups in the U.S.: County-Level Evidence

Abstract

Even as economic incentives are increasingly used by policymakers to spur state and local economic development, their use is controversial among the public and academics. We examine whether state and local incentives lead to higher rates of business start-ups in metropolitan counties. Existing research indicates that start-ups are important for supporting (net) job creation, long-term growth, innovation, and development. We find that incentives have a statistically significant, negative relationship with start-up rates in total and for some industries including export-based and others that often receive incentives. Our findings support critics who contend that incentives crowd out other economic activity, potentially reducing long-term growth. We also find that greater inter-sectoral job mobility is positively linked to total start-ups, consistent with claims of those who advocate for policies that enhance labor market flexibility via reducing barriers to movement of resources.