Research Highlights

How effective are local economic development incentives?

Many companies accept economic development incentives to locate or expand in a particular place, but how many wouldn’t have made that choice but for the incentive? A new research review from Timothy J. Bartik of the Upjohn Institute looks at typically-sized incentives, and finds that, at least 75 percent of the time, the company would have made the same choice even without the incentive.

Reviewing 34 estimates from research studies of incentives’ effects, Bartik found that typical incentives only tip 2 to 25 percent of location decisions—that is, the company wouldn’t have located there “but for” the incentive. Knowing this percentage could help policymakers determine whether incentives’ benefits are worth their cost.

In a new working paper, “’But For’ Percentages for Economic Development,” Bartik divides studies on the effects of economic development incentives into three categories: those that probably overestimate the effects, those that probably underestimate the effects and those without any obvious selection bias. Even biased studies, Bartik writes, help provide a plausible range for the effect of incentives.

Among the positively-biased estimates, the majority of the estimates reviewed, the median “but for” percentage was 23.5 percent. The negatively biased estimates suggest zero firms would have made location decisions based on the incentives. The studies with no obvious bias had a median “but for” percentage of 3.4 percent.

Low “but for” percentages could dramatically change benefit-cost calculations. Assuming the 3.4 “but for” percentage, the average incentive package isn’t worth its cost. Assuming the median percentage for all studies, 12.7 percent, the average incentive package produces a slight positive net benefit.

In light of this research, Bartik recommends a more critical look at claims of job creation stemming from incentives. Policymakers should consider whether the location or the company might have added jobs without the incentives, he writes. More realistic assumptions about incentive effects would help avoid overstatements of incentives’ benefits. Better measures of how incentives and taxes affect business costs would help obtain more precise estimates of incentive effects and how they differ across different industries and locations.  

Download the full paper, "'But For" Percentages for Economic Development Incentives: What Percentage Estimates are Plausible Based on the Research Literature"
Download the policy brief.

 

Research Highlights

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            Contact: Justin Carinci