The Political Economy of State Economic Development Incentives: A Case of Rent Extraction

66 Pages Posted: 27 Dec 2021

See all articles by Russell S. Sobel

Russell S. Sobel

The Citadel - School of Business

Gary A. Wagner

University of Louisiana-Lafayette; University of Louisiana-Lafayette

Peter Calcagno

College of Charleston - Department of Economics

Date Written: December 23, 2021

Abstract

There is a large literature examining the macroeconomic effects of state economic development incentives on employment, income, tax revenue, and economic growth. At best, these incentives are found to be weakly effective at job creation, but inefficient due to the distortions, secondary effects, and increased rent-seeking they encourage, with little public accountability. Given the evidence on their inefficiency, what explains their continued popularity? We find that large development incentives create substantial benefits for incumbent politicians in the form of both higher campaign contributions (particularly from business, labor, and construction sectors) and higher margins of victory at election time. Thus, political rent extraction may be the best explanation for the continued existence and popularity of these relatively ineffective incentive programs in states.

Keywords: Economic Development Incentives, Public Choice, Rent Extraction

JEL Classification: D72, H25, H71

Suggested Citation

Sobel, Russell S. and Wagner, Gary A. and Calcagno, Peter, The Political Economy of State Economic Development Incentives: A Case of Rent Extraction (December 23, 2021). Available at SSRN: https://ssrn.com/abstract=3992116 or http://dx.doi.org/10.2139/ssrn.3992116

Russell S. Sobel

The Citadel - School of Business ( email )

171 Moultrie St.
Charleston, SC 29409
United States

Gary A. Wagner

University of Louisiana-Lafayette

LA
United States

University of Louisiana-Lafayette ( email )

Lafayette, LA 70504
United States

Peter Calcagno (Contact Author)

College of Charleston - Department of Economics ( email )

66 George Street
Charleston, SC 29424
United States

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