Bargaining and the Effectiveness of Economic Development Incentives: Evidence from Jensen

Nathan Jensen (University of Texas-Austin) has an important new paper in Public Choice on “Bargaining and the Effectiveness of Economic Development Incentives: An Evaluation of the Texas Chapter 313 Program.” Here is the abstract:

Existing research has examined how the mobility of capital shapes bargains between firms and governments. The major barriers to examining bargaining behavior include the large number of dimensions to these bargains and differences in capacity and strategies firms and governments. In this paper, I examine data from a unique economic development incentive program in the state of Texas that holds almost all elements of bargaining constant, leaving only the ability of firms to walk away from a given location during the bargaining process. Using original data on the bargaining outcome as well as elite opinions, I document the extent to which firms that chose to locate in Texas made their decisions independent of this special economic development program. My findings suggest that only 15% of the firms participating in the program would have invested in another state without this incentive. The majority of these projects, and incentive dollars, were allocated to firms already committed to investing in Texas. Case studies of over 80 projects reveal that in many cases it was an open secret that companies had already committed to their investment locations prior to receiving the incentive. This implies that structure of the program encourages the overuse of incentives.

At the point estimates alluded to in the abstract, Jensen concludes that high end cost per job “created” estimates of $350,000/job are still too low.

Those that cover economic development incentives in their teaching might make use of some of the anecdotal cases covered in the paper. Many of the cases suggest that incentives were often approved even though the firms had already committed to their location. For example (p. 16):

The most surprisingly revelation is JD Wind’s application (Application #54) for a Chapter 313 agreement, 3 years after construction of a wind farm. In that application, JD Wind clearly points out that the original application for a wind project was submitted prior to construction by a previous project owner, but that that application never had been voted on by the school district. Thus, since only the fling of the application is technically required prior to construction, JD Wind applied for a 313 for those already built wind farms and for additional wind farms that would expand the project further. The project ultimately was approved by the school board and the Comptroller’s office for both the 3-year old facility as well as its expansion.

Check out Jensen’s Economic Development Incentive Evaluation Project and similarly themed blog from his website. His new book with Edmund Malesky, Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain (Cambridge Press), is available at Amazon (video).

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