Why Do Localities Provide Economic Development Incentives? Geographic Competition, Political Constituencies, and Government Capacity

Abstract

Abstract U . S . states and localities often engage in economic development policies using incentives and abatements for specific firms or industries. Yet, there is very little empirical evidence suggesting that such policies are successful. Why, then, do governments engage in these policies? In order to answer this question, we employ a model that considers not only geographic and economic factors, but also, in a novel application, local political conditions. A unique survey of U . S . county governments forms the basis for our empirical assessment of both traditional economic development policies and new‐wave policies. Using probit, P oisson, negative binomial, and spatial econometric models, we find evidence that the use of incentives is inversely related to local economic conditions. Furthermore, we find Republican counties are more apt to use incentives, though counties dominated by one political party are less likely to use them.