Public Choice

, Volume 164, Issue 3–4, pp 331–356 | Cite as

Competing for global capital or local voters? The politics of business location incentives

  • Nathan M. Jensen
  • Edmund J. Malesky
  • Matthew Walsh


The competition for global capital has led to interjurisdictional competition between countries, states and cities as to who can offer the most attractive incentives to firms. In this study, we examine the domestic politics of this competition by focusing on incentive use in the United States from 1999 to 2012. We define incentives as the targeted tax deductions or exemptions that are used to lure businesses into a locality. Drawing on data from municipal incentive programs, we examine how electoral competition shapes the use and oversight of targeted incentives. We find evidence that cities with elected mayors provide larger incentives than non-elected city managers by taking advantage of exogeneity in the assignment of city government institutions and a database of over 2000 investment incentives from 2010 to 2012. We also find that elected mayors enjoy more lax oversight of incentive projects than their appointed counterparts. Our results have important implications for the study of interjurisdictional competition and the role of electoral institutions in shaping economic policy.


Incentives Economic development Pandering Local government 



Thanks to Benjamin Crisman, Lillian Frost, Mi Jeong Shin and Kathryn Sproule for excellent research assistance and to Brady Baybeck, Adam Bonica, Randy Calvert, Jim Clinger, Bill Lowry, Gary Miller and Jessica Trounstine for comments and suggestions. Thanks to Kimberly Nelson for sharing her data with us. The Weidenbaum Center and Center for New Institutional Social Sciences at Washington University in St. Louis provided financial support for this project.

Supplementary material

11127_2015_281_MOESM1_ESM.docx (702 kb)
Supplementary material 1 (DOCX 702 kb)


  1. Ansolabehere, S. (2010). CCES, MIT PORTL module, 2005. Cambridge, MA: Harvard Dataverse, V2. Retrieved July 17, 2015, from
  2. Barrell, R., & Pain, N. (1999). Domestic institutions, agglomerations and foreign direct investment in Europe. European Economic Review, 43(4–6), 925–934.CrossRefGoogle Scholar
  3. Blomstrom, M., & Kokko, A. (2003). The economics of foreign direct investment incentives. CEPR Discussion Paper No. 3775.Google Scholar
  4. Bobonis, G. J., & Shatz, H. J. (2007). Agglomeration, adjustment, and state policies in the location of foreign direct investment in the United States. The Review of Economics and Statistics, 89(1), 30–43.CrossRefGoogle Scholar
  5. Bronzini, R., & de Blasio, G. (2006). Evaluating the impact of investment incentives: The case of Italy’s Law 488/1992. Journal of Urban Economics, 60(2), 327–349.CrossRefGoogle Scholar
  6. Buettner, T., & Ruf, M. (2007). Tax incentives and the location of FDI: Evidence from a panel of German multinationals. International Tax and Public Finance, 14(2), 151–164.CrossRefGoogle Scholar
  7. Byrnes, N., & Cowan, C. (2007). The high cost of wooing Google (July 22, 2007). New York, NY: Bloomberg Business, Magazine. Retrieved July 16, 2015, from
  8. Calcagno, P., & Hefner, F. (2009). South Carolina’s tax incentives: Costly, inefficient and distortionary. In P. Calcagno (Ed.), Unleashing capitalism: A prescription for economic prosperity in South Carolina (pp. 131–147). Columbia: South Carolina Policy Council Education Foundation.Google Scholar
  9. Canes-Wrone, B., Herron, M. C., & Shotts, K. W. (2001). Leadership and pandering: A theory of executive policymaking. American Journal of Political Science, 45(3), 532–550.CrossRefGoogle Scholar
  10. Caplan, B. (2007). The Myth of the Rational Voter. Princeton: Princeton University Press.Google Scholar
  11. Chapman, A. (2001). Jobs carry high price tag (August 5, 2001), Atlanta, GA: The Atlanta Journal Constitution, Section A1.Google Scholar
  12. Clingermayer, J. C., & Feiock, R. C. (2001). Institutional constraints and policy choice: An exploration of local government. Albany: State University of New York Press.Google Scholar
  13. Collier, K. (2013). Abbot expands on his view of Perry’s incentive program (July 13, 2013), Houston, TX: Houston Chronicle. Retrieved January 6, 2014, from
  14. Deno, K., & Mehay, S. L. (1987). Municipal management structure and fiscal performance: Do city managers make a difference? Southern Economic Journal, 53(3), 627–642.CrossRefGoogle Scholar
  15. Easson, A. (2004). Tax incentives for foreign direct investment. The Hague: Kluwer Law International.Google Scholar
  16. Enikolopov, R. (2014). Politicians, bureaucrats and targeted redistribution: the role of career concerns. SSRN Working Paper No. 945274. Retrieved July 17, 2015, from
  17. Feiock, R. C., Jeong, M. G., & Kim, J. (2003). Credible commitment and council-manager government: Implications for policy instrument choices. Public Administration Review, 63(5), 616–625.CrossRefGoogle Scholar
  18. Feiock, R. C., Steinacker, A., & Park, H. J. (2009). Institutional collective action and economic development joint ventures. Public Administration Review, 69(2), 256–270.CrossRefGoogle Scholar
  19. Fox, W. F., & Murray, M. N. (2004). Do economic effects justify the use of fiscal incentives? Southern Economic Journal, 71(1), 78–92.CrossRefGoogle Scholar
  20. Frazier, E., & Henderson, B. (2013). Google announces $600 M Lenoir data center expansion (April 19, 2013), Charlotte, NC: Charlotte Observer. Retrieved July 16, 2015, from
  21. Frederickson, H. G., Johnson, G. A., & Wood, C. H. (2004). The adapted city: Institutional dynamics and structural change. Armonk: ME Sharpe.Google Scholar
  22. Gabe, T. M., & Kraybill, D. S. (2002). The effect of state economic development incentives on employment growth of establishments. Journal of Regional Science, 42(4), 703–730.CrossRefGoogle Scholar
  23. Glaeser, E. L. (2001). The economics of location-based tax incentives. Harvard Institute of Economic Research Discussion Paper No. 1932.Google Scholar
  24. Glass, I. (2011). How to create a job: Transcript (May 13, 2011), Chicago, IL: This American Life, Episode 453. Retrieved January 6, 2014, from
  25. Greenstone, M., & Moretti, E. (2003). Bidding for industrial plants: Does winning a ‘million dollar plant’ increase welfare? NBER Working Paper No. 9844.Google Scholar
  26. Hagan, K. (2015). Commentary: Keep Hillsborough and Florida in film game by continuing tax credit program (May 31, 2015), Tampa, FL: The Tampa Tribune. Retrieved July 16, 2015, from
  27. Hainmueller, J. (2012). Entropy balancing for causal effects: A multivariate reweighting method to produce balanced samples in observational studies. Political Analysis, 20(1), 25–46.CrossRefGoogle Scholar
  28. Harrington, J. E, Jr. (1993). Economic policy, economic performance, and elections. The American Economic Review, 83(1), 27–42.MathSciNetGoogle Scholar
  29. Head, K., Ries, J., & Swenson, D. (1995). Agglomeration benefits and location choice: Evidence from Japanese manufacturing investments in the United States. Journal of International Economics, 38(3–4), 223–247.CrossRefGoogle Scholar
  30. Head, K. C., Ries, J. C., & Swenson, D. L. (1999). Attracting foreign manufacturing: Investment promotion and agglomeration. Regional Science and Urban Economics, 29(2), 197–218.CrossRefGoogle Scholar
  31. Hicks, M. J., & Shughart, W. F, I. I. (2007). Quit playing favorites: Why business subsidies hurt the economy. In R. S. Sobel, J. C. Hall, & M. E. Ryan (Eds.), Unleashing capitalism: Why prosperity ends at the West Virginia border. Morgantown: Public Policy Foundation of West Virginia.Google Scholar
  32. Huber, G. A., & Gordon, S. C. (2004). Accountability and coercion: Is justice blind when it runs for office? American Political Science Review, 48(2), 247–263.CrossRefGoogle Scholar
  33. (2013). The Only Global Incentives Database. Belfast: Investment Consulting Associates. Retrieved June 22, 2013, from
  34. ICMA/NLC. (1999, 2004, 2009). Economic Development Datasets. Washington, DC: International City/County Management Association/National League of Cities. Retrieved June 22, 2013, from
  35. Jensen, N. M., Malesky, E., Medina, M., & Ozdemir, U. (2014). Pass the bucks: Investment incentives as political credit-claiming devices. International Studies Quarterly, 58(3), 433–447.CrossRefGoogle Scholar
  36. Jolley, G. J., Lancaster, M. F., & Gao, J. (2015). Tax incentives and business climate: executive perceptions from incented and nonincented firms. Economic Development Quarterly, 29(2), 180–186.CrossRefGoogle Scholar
  37. Judd, D. R., & Swanstrom, T. (2010). City politics: The political economy of urban America. New York: Longman.Google Scholar
  38. Keen, M., & Mansour, M. (2010). Revenue mobilization in Sub-Saharan Africa: Challenges from globalisation II—corporate taxation. Development Policy Review, 28(5), 573–596.CrossRefGoogle Scholar
  39. Knoke, D. (1982). The spread of municipal reform: Temporal, spatial, and social dynamics. American Journal of Sociology, 87(6), 1314–1339.CrossRefGoogle Scholar
  40. Langfitt, F. (2009). Laid-off furniture workers try to leap to Google (December 16, 2009), National Public Radio, Retrieved July 17, 2015, from
  41. Lobao, L., & Kraybill, D. S. (2005). The emerging roles of county governments in metropolitan and nonmetropolitan areas: Findings from a national survey. Economic Development Quarterly, 19(3), 245–259.CrossRefGoogle Scholar
  42. Maskin, E., & Tirole, J. (2004). The politician and the judge: Accountability in government. The American Economic Review, 94(4), 1034–1054.CrossRefGoogle Scholar
  43. Mason, S., & Thomas, K. P. (2010). Tax incremental financing in Missouri: An analysis of determinants, equity, and path dependency. Economic Development Quarterly, 24(2), 169–179.CrossRefGoogle Scholar
  44. Miller, G. J. (2011). Government budgeting and financial management in practice. Boca Raton: CRC Press.CrossRefGoogle Scholar
  45. Montjoy, R. S., & Watson, D. J. (1993). Within-region variation in acceptance of council-manager government: Alabama and the Southeast. State and Local Government Review, 25(1), 19–27.Google Scholar
  46. Morisset, J., & Pirnia, N. (1999). How tax policy and incentives affect foreign direct investment. World Bank Policy Research Working Paper No. 2509.Google Scholar
  47. Mrozek, P. (2013). Speaker critical of tax incentive packages for retail projects (May 31, 2013), Batavia, NY: The Daily News. Retrieved January 6, 2014, from
  48. Nelson, K. (2011). State-level autonomy and municipal government structure: Influence on form of government outcomes. American Review of Public Administration, 41(5), 542–561.CrossRefGoogle Scholar
  49. Newport, F. (2011). Americans favor jobs plan proposals, including taxing rich (September 20, 2011), Gallup Politics. Retrieved January 6, 2014, from
  50. Newport, F. (2012). Americans focus on jobs as best way to improve US economy (July 19, 2012), Gallup Politics. Retrieved January 6, 2014, from
  51. Persson, T., Roland, G., & Tabellini, G. (1997). Separation of powers and political accountability. Quarterly Journal of Economics, 112(4), 1163–1202.CrossRefGoogle Scholar
  52. Peters, A., & Fisher, P. (2004). The failures of economic development incentives. Journal of the American Planning Association, 70(1), 27–37.CrossRefGoogle Scholar
  53. Pluta, R. (2013). Governor hopes to rely less on state incentives for future jobs (January 24, 2013), Ann Arbor, MI: Michigan Radio. Retrieved January 6, 2014, from
  54. Rauch, J. (1995). Bureaucracy, infrastructure, and economic growth: Evidence from US cities during the Progressive Era. American Economic Review, 85(4), 968–979.Google Scholar
  55. Reese, L. A., & Rosenfeld, R. A. (2001). Yes, but…: Questioning the conventional wisdom about economic development. Economic Development Quarterly, 15(4), 299–312.CrossRefGoogle Scholar
  56. Rice, B. R. (1977). Progressive cities: The commission movement in America, 1901–1920. Austin: University of Texas Press.Google Scholar
  57. Richard Caplan & Associates. (2009). Analysis of state level economic development contingency funds. Topeka: Kansas Inc.Google Scholar
  58. Schiesl, M. J. (1977). The politics of efficiency: Municipal administration and reform in America: 1880–1920. Berkeley: University of California Press.Google Scholar
  59. Schumacher-Matos, E. (2011). Planet Money misfires on local economic developers (June 22, 2011), National Public Radio, Ombudsman. Retrieved January 6, 2014, from
  60. Sentinel, O. (2009). We think: Incentives will allow state to become competitive in film game (January 2, 2009), Orlando, FL: Orlando Sentinel. Retrieved July 17, 2015, from
  61. Sharp, E. B., & Mullinix, K. (2012). Holding their feet to the fire: Explaining variation in city governments’ use of controls on economic development. Economic Development Quarterly, 26(2), 138–150.CrossRefGoogle Scholar
  62. Talton, S. (2014). Seattle needs to get off the bench in the global-investment game (April 12, 2014), Seattle, WA: Seattle Times. Retrieved July 17, 2015, from
  63. Tavits, M. (2009). Presidents with prime ministers: Do direct elections matter?. Oxford: Oxford University Press.Google Scholar
  64. Thomas, K. P. (2007). Investment incentives: Growing use, uncertain benefits, uneven controls. Geneva: International Institute for Sustainable Development, Global Subsidies Initiative.Google Scholar
  65. Thomas, K. P. (2011). Investment incentives and the global competition for capital. New York: Palgrave Macmillan.Google Scholar
  66. Thomas, K., & Wishlade, F. (2009). Locational tournaments in the US and the EU. European Policy Research Centre Working Paper. Retrieved July 17, 2015, from
  67. Thornton, G. (2013). Global economy in 2013: uncertainty weighing on growth, London: Grant Thornton International Business Report. Retrieved July 16, 2015, from
  68. Tullock, G. (2005). The social dilemma: of autocracy, revolution, coup d’état, and war. In C. K. Rowley (Ed.), The economics of politics (Vol. 4). Indianapolis, IN: Liberty Fund Inc.Google Scholar
  69. Utah Office of the Legislative Auditor General (2013). A performance audit of Utah Science Technology and Research Initiative. Report to the Utah Legislature No. 2013-12.Google Scholar
  70. Vlaicu, R., & Whalley, A. (2014). Hierarchical accountability in government. SSRN Working Paper No. 1925005. Retrieved July 17, 2015, from
  71. Weingast, B. R., & Moran, M. J. (1983). Bureaucratic discretion or congressional control? Regulatory policymaking by the Federal Trade Commission. Journal of Political Economy, 91(5), 765–800.CrossRefGoogle Scholar
  72. Wells, L. T., Allen, N. J., Morisset, J., & Pirnia, N. (2001). Using tax incentives to compete for foreign investment: Are they worth the costs?. Occasional Paper No: FIAS. 15.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.George Washington UniversityWashingtonUSA
  2. 2.Duke UniversityDurhamUSA
  3. 3.SpringfieldUSA

Personalised recommendations