The Economics of a Targeted Economic Development Subsidy

62 Pages Posted: 9 Jan 2020

See all articles by Matthew D. Mitchell

Matthew D. Mitchell

Fraser Institute; Knee Center for the Study of Occupational Regulation; Mercatus Center at George Mason University

Michael D. Farren

George Mason University - Mercatus Center

Jeremy Horpedahl

George Mason University - Department of Economics

Olivia Gonzalez

George Mason University, Department of Economics, Students

Date Written: January 7, 2020

Abstract

In an effort to spur economic growth and to burnish their job-creation bona fides, policymakers at the federal, state, and local levels often dispense targeted economic development subsidies. These selective incentives include targeted tax relief, targeted regulatory relief, cash subsidies, and in-kind donations of land and other valuable goods and services. The weight of economic theory suggests that these subsidies do not work and may even depress economic activity. In this paper, we review the economic case for and against targeted economic development subsidies, using Wisconsin’s $1.2 billion to $3.6 billion subsidy to Foxconn to illustrate these points. We show that under realistic scenarios the subsidy may depress state economic activity by tens of billions of dollars over the next 15 years.

Keywords: targeted economic development subsidies, economic development, regional growth, job growth, incentives, subsidies, rent-seeking

JEL Classification: H71, O1, R11

Suggested Citation

Mitchell, Matthew D. and Farren, Michael D. and Horpedahl, Jeremy and Gonzalez, Olivia, The Economics of a Targeted Economic Development Subsidy (January 7, 2020). Mercatus Research Paper, Available at SSRN: https://ssrn.com/abstract=3515377 or http://dx.doi.org/10.2139/ssrn.3515377

Matthew D. Mitchell (Contact Author)

Fraser Institute ( email )

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Michael D. Farren

George Mason University - Mercatus Center ( email )

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HOME PAGE: http://mercatus.org/michael-farren

Jeremy Horpedahl

George Mason University - Department of Economics ( email )

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Fairfax, VA 22030
United States

Olivia Gonzalez

George Mason University, Department of Economics, Students ( email )

Fairfax, VA
United States

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