Local Governments as Risk Takers and Risk Reducers: An Examination of Business Subsidies and Subsidy Controls

Abstract

Many U.S. local governments that promote economic development give business subsidies, creating high levels of risk and uncertainty. Their main concern is that firms receiving subsidies may not benefit the city as much as the cost of the subsidies. To overcome this risk and uncertainty, many local governments now use subsidy controls, such as performance agreements, clawback clauses, and evaluation policies. Using survey data from more than 1,600 local governments, the author found that the majority use both business subsidies and subsidy controls. A positive association exists between these two activities: Local governments that give more in subsidies tend to employ more subsidy controls. This suggests that there is not a trade-off but rather a complementary relationship between promoting development aggressively by giving subsidies and regulating businesses to ensure that city residents benefit from subsidies.