I recently came across an interesting working paper that looks at the political side of local economic development incentives. The paper hypothesizes that elected mayors are more likely to use incentives than non-mayor (mostly city manager) forms of government and that mayor-council systems are less likely to require cost-benefit analyses or have performance requirements that might limit use of incentive programs.

The authors found that, indeed, cities with elected mayors offer more total incentives and higher incentives per project, and they are less subject to restraints in program use than are cities run by appointed managers.

They theory behind the hypotheses is that politicians know voters are interested in economic outcomes, specifically attracting investment. However, voters are misinformed about the importance of incentives in attracting that investment.  Since voters believe incentives are effective policy, politicians that provide incentives “signal their own alignment with the voters’ interest” even when incentives are not economically efficient or necessary.

In the authors’ words:

“If the firm locates in the district, politicians can point to the incentives as the main policy lever used to attract the investment. If the firm does not locate in the district, the politicians can point to a generous incentive offer as a means of reducing blame for not attracting the investment.”

and

“If institutions constrain incentive use to only “effective” incentives, politicians lack the ability to exploit the information asymmetry with voters and to take credit for investment that was going to come in the absence of incentives.”

The paper’s methodology is not perfect, and there are several caveats throughout.  Most importantly, omitted variables could account for the observed differences.  

Still, the theory behind it is what I found interesting.  It raises an important point about what voters expect city leaders to do about economic development.  And it suggests that efforts to encourage better decision-making throughout the incentives process and to implement evidence-based policies should also acknowledge the political calculus behind those economic and fiscal decisions. 

 

“Competing for Global Capital or Local Voters? The Politics of Business Location Incentives,” by Nathan M. Jensen, Edmund Malesky and Matthew Walsh. 2013.

Note: Data on form of government and incentive use are from the ICMA Economic Development Surveys (1999, 2004 and 2009 (with the National League of Cities)) and the ICA Incentives database.

 

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