Economic Development Incentives: Traps and Accountability

Abstract

The practice of offering economic development incentives in the US is receiving increasing attention from national policy organizations as well as the popular press. The attention is due to the intense competition between state and local governments, which is driving up the number and value of economic development incentive packages offered. At the same time, the conclusions from the extensive and expanding empirical literature fail to substantiate the efficacy of such programs. Indeed, the call for increased accountability and better cost-benefit analysis of deals is critical.

In this paper we discuss information solutions for increasing accountability in the business of offering economic development incentives. Specifically, we appeal to the procedural duty of care in the corporate environment where boards of directors (and so ultimately management) make decisions on behalf of shareholders. We argue that government decision makers should be held accountable to citizen stakeholders in a similar fashion. To satisfy a procedural duty of care, government decision makers would ask the right questions, perform comprehensive cost-benefit analysis, and provide public access to relevant information related to incentive packages.

From a global perspective, concern about offering incentives under the guise of economic development is also a persistent concern. Policy coordination across sovereign countries is difficult to establish and to effectively enforce. Even in the EU, which has strict rules about incentives competition, there are concerns about illegal subsidies. Following a process which facilitates the dissemination of information, such as suggested in our discussion, would enhance the decision-making process at all levels of government worldwide.

Keywords: Economic development incentives, Subsidies, United States, Business subsidies, Local governments, Incentive programs, Accountability