Economic development incentive program deadweight: The role of program design features, firm characteristics, and location

Abstract

This paper examines the effectiveness of state economic development incentive programs in stimulating new business activity. It reviews literature that identifies factors that potentially influence the effectiveness of incentives. Empirical work draws on a 2018 survey of approximately 150 firms that received at least one award for startup, expansion, or relocation purposes during the period SFY2010–SFY2016 from a state economic development incentive program (i.e., grant, tax credit, loan, equity investment) offered by the Commonwealth of Virginia. The paper evaluates the role of program design features (e.g., discretionary vs. automatic, relative size of incentive), firm characteristics (e.g., size of firm, industry), and locational variables (e.g., state boundary location, rurality) on firm assessments of the role of incentives in business growth decisions. It finds that firms that receive up‐front or discretionary program awards and undertake multistate site searches are less likely to report that the incentive was not needed for their project to succeed. These results suggest that automatic, back‐loaded award programs, and programs that fund noncompetitive projects are less likely to affect firm location and expansion decisions.

State Economic Impacts of Industrial Park Development: Evidence from Virginia’s Tobacco Region Megasite Program

“…Since the "but for" effect formula is based on firm reactions to business cost changes due to tax changes, it more typifies the likely firm response to an automatic or non-discretionary tax reduction rather than discretionary incentive. Ordinarily, greater discretion and due diligence may be expected to improve the likelihood of selecting only those projects most at risk of expanding elsewhere rather than providing the incentive across the board(Rephann, 2020). 12 Based on the site selection consultant estimate that business-ready sites can save firms $50,000 for megasites (i.e., 1,000 acre plus park) reported earlier, the average incentive per acre of $500 equates to an estimated savings of $279 per worker occupant of a Virginia industrial park.…”