The Review of Austrian Economics

, Volume 28, Issue 3, pp 337–356 | Cite as

The political economy of state-provided targeted benefits

  • Christopher J. Coyne
  • Lotta MobergEmail author


The governments of American states often attempt to incentivize businesses to locate within their borders by offering targeted benefits to particular industries and companies. These benefits come in many forms, including business tax credits for investments, property tax abatements, and reductions in the sales tax. Despite good intentions, policymakers often overlook the unseen and unintended negative consequences of targeted-benefit policies. This paper analyzes two major downsides of these policies: (1) they lead to a misallocation of resources, and (2) they encourage rent-seeking and thus cronyism. We argue that these costs, which are often longer-term and not readily observable at the time the targeted benefits are granted, may very well outweigh any possible short-term economic benefits.


H1 H2 H3 P16 

JEL classification

Target benefits Economic calculation Cronyism 


  1. Abrams, B., & Schitz, M. D. (1978). The ‘crowding-out’ effect of governmental transfers on private charitable contributions. Public Choice, 33(1), 29–39.CrossRefGoogle Scholar
  2. Acemoglu, D. (1995). Reward structures and the allocation of talent. European Economic Review, 39, 17–33.CrossRefGoogle Scholar
  3. Aligica, P. D., & Tarko, V. (2014). Crony capitalism, rent seeking, institutions and ideology. Kyklos, 67(2), 156–176.CrossRefGoogle Scholar
  4. Bairam, E., & Ward, B. (1993). The externality effect of government expenditure on investment in OECD countries. Applied Economics, 25(6), 711–716.CrossRefGoogle Scholar
  5. Baldwin, R. (2012). Trade and Industrialization after Globalization’s 2nd Unbundling: How Building and Joining a Supply Chain Are Different and Why It Matters. NBER working paper. Available online:
  6. Barnet, R. J. (1994). Lords of the Global Economy: Stateless Corporations.Nation, 19 December 1994, 259(21).Google Scholar
  7. Bartik, T. J., & Erickcek, G. A. (2012). Simulating the Effects of Michigan’s MEGA Tax Credit Program on Job Creation and Fiscal Benefits. Upjohn Institute working paper 121–85. Available online:
  8. Basker, E. (2005). Job creation or destruction? Labor market effects of wal-mart expansion. Review of Economics and Statistics, 87(1), 174–183.CrossRefGoogle Scholar
  9. Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5), 893–921.CrossRefGoogle Scholar
  10. Becker, G. S. (1983). A theory of competition among pressure groups for political influence. Quarterly Journal of Economics, 98(3), 371–400.CrossRefGoogle Scholar
  11. Billings, S. (2009). Do enterprise zones work? An analysis at the borders. Public Finance Review, 37(1), 68–93.CrossRefGoogle Scholar
  12. Binder, M. (2008). Give Film Industry Tax Credit a Chance to Grow State Jobs.Detroit Free Press, June 18, 2008.Google Scholar
  13. Boarnet, M. G., & Bogart, W. T. (1996). Enterprise zones and employment: Evidence from New Jersey. Journal of Urban Economics, 40, 198–215.CrossRefGoogle Scholar
  14. Boettke, P. J. (1998). Economic calculation: The Austrian contribution to political economy. Advances in Austrian Economics, 5, 131–158.Google Scholar
  15. Boettke, P. J., & Leeson, P. (2004). Liberalism, socialism, and robust political economy. Journal of Markets and Morality, 7, 99–111.Google Scholar
  16. Bondonio, D., & Engberg, J. (2000). Enterprise zones and local employment: Evidence from the States’ programs. Regional Science and Urban Economics, 30(5), 519–549.CrossRefGoogle Scholar
  17. Buchanan, J. M., & Congleton, R. (1998).Politics by Principle, Not Interest: Toward Nondiscriminatory Democracy.Cambridge University Press.Google Scholar
  18. Buchanan, J. M. (1986). The Constitution of Economic Policy. Nobel Lecture, in: Nobel Lectures: Economic Sciences 1981–1990 (Karl-GöranMäller ed.),180-9.Google Scholar
  19. Burnett, J.(2011). State Business Incentives: Trends and Options for the Future.The Council of State Governments report.Google Scholar
  20. Busso, M., Gregory, J., & Kline, P. (2013). Assessing the incidence and efficiency of a prominent place based policy. American Economic Review, 103(2), 897–947.CrossRefGoogle Scholar
  21. Calcagno, P. T., & Hefner, F. (2009). South Carolina’s Tax Incentives: Costly, Inefficient and Distortionary. Ch. 7 in Unleashing Capitalism: A Prescription for Economic Prosperity in South Carolina (Calcagno, P. J. ed.), 131–47.Google Scholar
  22. Catawba County Board of Commissioners and Maiden Town Council,(2009). Resolution No. 2009: Resolution Authorizing Economic Incentives for Apple Inc. Joint Special Meeting with Maiden Town Council, July 6, 2009. Available online:
  23. Chandler, A. D. (1990). Scale and Scope: The Dynamics of Industrial Capitalism, Harvard University Press.Google Scholar
  24. Cohen, J. E. (1986). The dynamics of the ‘revolving door’ on the FCC .American. Journal of Political Science, 30(4), 689–708.CrossRefGoogle Scholar
  25. Cowen, T. (2007). When should regions bid for artistic resources? Review of Austrian Economics, 20, 1–10.CrossRefGoogle Scholar
  26. Coyne, C. J. (2013). Doing bad by doing good: Why humanitarian action fails. California: Stanford University Press.Google Scholar
  27. Coyne, C. J., Sobel, R. S., & Dove, J. A. (2010). The non-productive entrepreneurial process. Review of Austrian Economics, 23, 333–346.CrossRefGoogle Scholar
  28. Desrochers, P., & Sautet, F. (2004). Cluster-based economic strategy, facilitation policy and the market process. Review of Austrian Economics, 17(2/3), 233–245.CrossRefGoogle Scholar
  29. Di Tommaso, M. R., & Schweitzer, S. O. (2013).Industrial Policy in America: Breaking the Taboo. Edward Elgar Publishing Ltd.Google Scholar
  30. Elvery, J. A. (2009). The impact of enterprise zones on resident employment: An evaluation of the enterprise zone programs of California and Florida. Economic Development Quarterly, 23(1), 44–59.CrossRefGoogle Scholar
  31. Enrich, P. D. (1996). Saving the states from themselves: commerce clause constraints on state tax incentives for business. Harvard Law Review, 110(2), 377–468.CrossRefGoogle Scholar
  32. Fehrenbacher, K. (2012). 10 Reasons Apple, Facebook & Google Chose North Carolina for Their Mega Data Centers.Gigaom, July 10, 2012. Available online:
  33. Fisher, P. S., & Alan H. P. (1998). State and Local Incentive Competition for New Investment. In: Industrial Incentives: Competition among American States and Cities. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, 1–30.Google Scholar
  34. 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
  35. GAO—United States General Accounting Office. (1988). Enterprise Zones: Lessons from the Maryland Experience. Report to Congressional Requesters, Program Evaluation and Methodology Division, B-205687.Google Scholar
  36. García-Quevedo, J. (2004). Do Public subsidies complement business R&D? A meta-analysis of the econometric evidence. Kyklos, 57(1), 87–102.CrossRefGoogle Scholar
  37. Gates, D. (2014). Boeing picks Everett for building wing of 777X.Seattle Times,February 16. Available online:
  38. Gobillon, L., Magnac, T., & Selod, H. (2012). Do Unemployed Workers Benefit from Enterprise Zones? The French Experience. CEPR Discussion Paper No. DP8084. Available online:
  39. Goozner, M. (1989). Sears Picks Hoffman Estates. Chicago Tribune, June 26. Available online:
  40. Ham, J. C., Swenson, C., İmrohoroğlu, A., & Song, H. (2011). Government programs can improve local labor markets: Evidence from state enterprise zones, federal empowerment zones and federal enterprise communities. Journal of Public Economics, 95(7/8), 779–797.CrossRefGoogle Scholar
  41. Hanson, A. (2009). Local employment, poverty and property-value effects of geographically-targeted tax incentives: An instrumental variable approach. Regional Science and Urban Economics, 39(6), 721–731.CrossRefGoogle Scholar
  42. Hayek, F. A. (1945). The use of knowledge in society. American Economic Review, 35(4), 519–530.Google Scholar
  43. Hayek, F. A. (1960). The constitution of liberty. Chicago: Chicago University Press.Google Scholar
  44. Hoff, T. J. B. (1981). Economic calculation in the socialist society. Indianapolis: Liberty Fund, Inc.Google Scholar
  45. Holcombe, R. G. (1998). Entrepreneurship and economic growth. Quarterly Journal of Austrian Economics, 1(2), 45–62.CrossRefGoogle Scholar
  46. Holcombe, R. G. (2004). The new urbanism versus the market process. The Review of Austrian Economics, 17(2–3), 285–300.CrossRefGoogle Scholar
  47. Holcombe, R. G. (2013). Crony capitalism: By-product of big government. The Independent Review: A Journal of Political Economy, 17(4), 541–559.Google Scholar
  48. Horwitz, S. (1996). Money, money prices, and the socialist calculation debate. Advances in Austrian Economics, 3, 59–77.CrossRefGoogle Scholar
  49. Horwitz, S. (1998). Monetary calculation and Mises’ critique of planning. History of Political Economy, 30(3), 427–450.CrossRefGoogle Scholar
  50. Ikeda, S. (2004). Urban interventionism and local knowledge. The Review of Austrian Economics, 17(2–3), 247–264.CrossRefGoogle Scholar
  51. Ikeda, S., & Staley, S. (2004). Introductory essay for a symposium on ‘urban interventionism’. The Review of Austrian Economics, 17(2–3), 151–154.CrossRefGoogle Scholar
  52. Jia, P. (2008). What happens when wal-mart comes to town: An empirical analysis of the discount retailing industry. Econometrica, 76(6), 1263–1316.CrossRefGoogle Scholar
  53. Kenney, M., & Florida, R. (1991). How Japanese industry is rebuilding the rust belt. Technology Review, 94(2), 24–33.Google Scholar
  54. Kenyon, D. A., Langley, A. H., & Paquin, B. P. (2012). Rethinking Property Tax Incentives for Business. Lincoln Institute of Land Policy. Available online:
  55. Kronick, R., & Gilmer, T. (2002). Insuring low-income adults: Does public coverage crowd out private? Health Affairs, 21(1), 225–239.CrossRefGoogle Scholar
  56. Krugman, P. (1991). Geography and Trade, MIT Press.Google Scholar
  57. Krugman, P. (1993). The Current Case for Industrial Policy. Ch. 7 in. Protectionism and World Welfare (Salvatore, D. ed.), Cambridge University Press.Google Scholar
  58. Laffont, J., & Tirole, J. (1991). The politics of government decision-making: A theory of regulatory capture. Quarterly Journal of Economics, 106(4), 1089–1127.CrossRefGoogle Scholar
  59. Lavoie, D. (1985a). Rivalry and central planning: The socialist calculation debate reconsidered. New York: Cambridge University Press.Google Scholar
  60. Lavoie, D. (1985b). National economic planning: What Is left? Massachusetts: Ballinger Publishing Company.Google Scholar
  61. Leaver, C. (2009). Bureaucratic minimal squawk behavior: Theory and evidence from regulatory agencies. American Economic Review, 99(3), 572–607.CrossRefGoogle Scholar
  62. Leeson, P. T., & Subrick, J. R. (2006). Robust political economy. The Review of Austrian Economics, 19, 107–111.CrossRefGoogle Scholar
  63. LeRoy, G. (2005). The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation, Berett-Koehler Publishers, Inc.Google Scholar
  64. Levy, D. (2002). Robust institutions. The Review of Austrian Economics, 15, 131–142.CrossRefGoogle Scholar
  65. Los Angeles Times, (1998). Subsidy Deal Persuades NYSE to Stay in N.Y. December 23. Available online:
  66. Luther, W. (2010). Movie Production Incentives: Blockbuster Support for Lackluster Policy. Special Report for the Tax Foundation No. 173, January 2010.Google Scholar
  67. Lynch, D., & Zax, J. S. (2011). Incidence and substitution in enterprise zone programs: The case of Colorado. Public Finance Review, 39(2), 226–255.CrossRefGoogle Scholar
  68. Mattera, P., Tarczynska K., & LeRoy G. (2013). Megadeals: The Largest Economic Development Subsidy Packages Ever Awarded by State and Local Governments in the United States. Report for Good Jobs First. Available online:
  69. Mazumdar, S. (2008). Crony Capitalism and India: Before and After Liberalization. Institute for Studies in Industrial Development Working paper No.2008/04 Available online:
  70. McArdle, J. (2011). Solyndra Spent Liberally to Woo Lawmakers Until the End, Records Show. New York Times, September 16. Available Online:
  71. McChesney, F. S. (1987). Rent extraction and rent creation in the economic theory of regulation. Journal of Legal Studies, 16(1), 101–118.CrossRefGoogle Scholar
  72. McCourt, J., & LeRoy, G. (2003). A Better Deal for Illinois: Improving Economic Development Policy. Good Jobs First. Available online:
  73. McNamee, M. (1995). A Torrent Of Tax Breaks, Bloomberg Businessweek, October 1. Available online:
  74. Milward, B. H., & Newman, H. H. (1989). State incentive packages and the industrial location decision. Economic Development Quarterly, 3, 203.CrossRefGoogle Scholar
  75. Milyo, J. (2013). Corporate Influence and Political Corruption: Lessons from Stock Market Reactions to Political Events.Independent Review, forthcoming.Google Scholar
  76. Mises, L. (1920). Economic calculation in the socialist Commonwealth. In F. A. Hayek (Ed.), Collectivist economic planning (pp. 87–130). London: George Routledge & Sons.Google Scholar
  77. Mises, L. (1949). 1996. Human action (4th ed.). San Francisco: Fox & Wilkes.Google Scholar
  78. Mises, L. (1977). A critique of interventionism. USA: Arlington House Publishers.Google Scholar
  79. Mitchell, M. (2012). The Pathology of Privilege: The Economic Consequences of Government Favoritism. Mercatus Research. Available online:
  80. Myerson, A. R. (1996). O Governor, Won’t You Buy Me a Mercedes Plant? New York Times, September 1. Available Online:
  81. Nader, R. (2001). Letter to Mayor Rudolph Giuliani, February 12, Washington, DC. Available online:
  82. New York Times, (2014). United States of Subsidies: A Series Examining Business Incentives and Their Impact on Jobs and Local Economies. Available online:
  83. O’Connor, J. (2011). Illinois Gov. Signs Tax Breaks for Sears, CME. Associated Press, December 16. Available online:
  84. O’Keefe, S. (2004). Job creation in california’s enterprise zones: A comparison utilizing a propensity score matching model. Journal of Urban Economics, 55(1), 131–150.CrossRefGoogle Scholar
  85. News & Observer, (2007).What the State, Local Deals Say. February 11. Available online:
  86. Office of the Governor, State of Louisiana, (2011). Gov. Jindal and Cheniere Energy CEO Announce $6 Billion Natural Gas Liquifaction Facility in Louisiana. July 19. Available online:
  87. Papke, L. E. (1994). Tax policy and urban development: Evidence from the Indiana enterprise zone program. Journal of Public Economics, 54, 37–49.CrossRefGoogle Scholar
  88. Parrott, J. A. (2001). New York Stock Exchange Subsidy Deal. Testimony at the Public Hearing of the Empire State Development Corporation on the New York Stock Exchange Project Held Pursuant to the Eminent Domain Procedure Law, Alexander Hamilton United States Customs House, January 8. Available online:
  89. Pennington, M. (2004). Citizen participation, the knowledge problem and urban land use planning: An Austrian perspective on institutional choice. The Review of Austrian Economics, 17(2–3), 213–231.CrossRefGoogle Scholar
  90. Pennington, M. (2013). Robust political economy. Northampton: Edward Elgar Publishing, Ltd.Google Scholar
  91. Peters, A., & Fisher, F. (2004). The failures of economic development incentives. Journal of the American Planning Association, 70(1), 27–37.CrossRefGoogle Scholar
  92. Pew Centre on the States, (2012). Evidence Counts: Evaluating State TaxIncentives for Jobs and Growth.Available Online:
  93. Phelps, E. (2013). Mass flourishing. New Jersey: Princeton University Press.Google Scholar
  94. Porter, M. E. (2000). “Location, competition, and economic development: Local clusters in a global economy”. Economic development quarterly, 14(1), 15–34.CrossRefGoogle Scholar
  95. Ramsey, F. (1927). A contribution to the theory of taxation. Economic Journal, 37, 47–61.CrossRefGoogle Scholar
  96. Rosenstein-Rodan, P. N. (1943). Problems of industrialization of Eastern and South-Eastern Europe. Economic Journal, 53(210/211), 202–211.CrossRefGoogle Scholar
  97. Seshadri, T., & Storr, V. H. (2010). Knowledge problems associated with creating export zones. The Review of Austrian Economics, 23(4), 347–366.CrossRefGoogle Scholar
  98. Sowell, T. (1980). Knowledge and decisions. New York: Basic Books.Google Scholar
  99. Staley, S. R. (2004). Urban planning, smart growth, and economic calculation: An Austrian critique and extension. The Review of Austrian Economics, 17(2–3), 265–283.CrossRefGoogle Scholar
  100. Stark, K. J., & Wilson, D. J. (2006). What do we know about the interstate economic effects of state tax incentives? Georgetown Journal of Law and Public Policy, 4(4), 133–164.Google Scholar
  101. Story, L. (2012). Lines Blur as Texas Gives Industries a Bonanza. New York Times, December 2. Available online:
  102. Studwell, J. (2013). How Asia Works: Success and Failure in the World’s Most Dynamic Region, Grove PressGoogle Scholar
  103. Summers, A. B., & Chawla A. (2013). “Tax Credits in California: Economic Growth Engine or Wasteful Corporate Welfare?”Reason Foundation Policy Study 412.Google Scholar
  104. Taylor, M. (1993). A proposal to prohibit industrial relocation subsidies. Texas Law Review, 72, 669–713.Google Scholar
  105. Thaler, R. H. (1992).The Winner’s Curse: Paradoxes and Anomalies of Economic Life, Princeton University PressGoogle Scholar
  106. Thomas, K. (2011). Investment incentives and the global competition for capital. NewYork: Palgrave Macmillan.Google Scholar
  107. Thomsen, E. F. (1992). Prices and knowledge: A market-process perspective. New York: Routledge.CrossRefGoogle Scholar
  108. Tomsho, R. (1995). Growing Pains: Rio Rancho Wooed Industry and Got It, Plus Financial Woes.Wall Street Journal, April 11.Google Scholar
  109. Vidal, J. B., Draca, M., & Fons-Rosen, C. (2012). Revolving door lobbyists. American Economic Review, 102(7), 3731–3748.CrossRefGoogle Scholar
  110. Wade, R. (1990). Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton University PressGoogle Scholar
  111. Wagner, J. E., & Deller, S. C. (1998). Measuring the effects of economic diversity on growth and stability. Land Economics, 74(4), 541–556.CrossRefGoogle Scholar
  112. Wallis, J. J. (2006). The Concept of Systematic Corruption in American History. In: Corruption and Reform: Lessons from America’s Economic History (Glaeser, E. L., & Goldin, C. eds.), University of Chicago Press.Google Scholar
  113. Wilder, M. G., & Rubin, B. M. (1996). Rhetoric versus reality: A review of studies on state enterprise zone programs. Journal of the American Planning Association, 62(4), 473–491.CrossRefGoogle Scholar
  114. Wilson, R. (2013). Washington Just Awarded the Largest State Tax Subsidy in U.S. history. Washington Post, November 12. Available online:
  115. Zingales, L. (2012). A capitalism for the people: Recapturing the lost genius of American prosperity. New York: Basic Books.Google Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of EconomicsGeorge Mason UniversityFairfaxUSA

Personalised recommendations