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

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