The political economy of state-provided targeted benefits

Abstract

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.

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Notes

  1. 1.

    Our analysis also contributes to the Austrian literature exploring “urban interventionism” (see Ikeda and Staley 2004; Pennington 2004; Desrochers and Sautet 2004; Ikeda 2004; Staley 2004; Holcombe 2004) and on attempts to create export zones to foster economic development (Seshadri, and Storr 2010).

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Coyne, C.J., Moberg, L. The political economy of state-provided targeted benefits. Rev Austrian Econ 28, 337–356 (2015). https://doi.org/10.1007/s11138-014-0274-8

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Keywords

  • H1
  • H2
  • H3
  • P16

JEL classification

  • Target benefits
  • Economic calculation
  • Cronyism