Introduction
Economic development incentives have a long history of usage across state and local governments. These incentives have been touted by public officials as a means to enhance and stimulate firm formation, job creation, entrepreneurship, and ultimately economic development.
While the use of such incentives has ebbed and flowed over time, it appears that the employment of these various incentives has been on the rise over the past several decades, resulting in intensive competition between state and local governments as they attempt to attract firms and stimulate economic activity within their respective jurisdictions.These developments have led to a growing body of literature that has evaluated the impact that such incentives have on various measures of economic wellbeing including economic growth (Bondonio and Engberg
J. A. Dove (B)
Troy University, Troy, AL, USA e-mail: jadove@troy.edu
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A. John and D. W. Thomas (eds.), Entrepreneurship and the Market
Process, Mercatus Studies in Political and Social Economy, https://doi.org/10.1007/978-3-030-42408-4_7
2000; Greenbaum and Engberg 2004; Bondonio and Greenbaum 2007), firm formation (Hanson and Rohlin 2011a, b), and job creation (Rubin and Wilder 1989; Erickson and Friedman 1990; Papke 1994; Grasso and Crosse 1991; Logan and Barron 1991; Elvery 2009; Neumark and Kolko 2010; O'Keefe 2004). While some studies do find a positive relationship between economic development incentives and enhanced economic opportunity and growth, the bulk of the evidence suggests that such incentives tend to retard economic performance within a state or local jurisdiction (see Thomas [2011] for a fairly recent review of the literature).
However, an important issue in regard to these incentives—and one that is touted as being a major driver behind the provision of such benefits—is the impact those incentives have on entrepreneurship.
For instance, the Delaware Prosperity Partnership, a joint private-public partnership, is tasked specifically with assisting aspiring entrepreneurs and growing small businesses (Goss 2017). Further, the state of Virginia explicitly pushes funding to incentivize entrepreneurial endeavors within the state, as do many local economic development boards (McGee 2017). Numerous other instances across state and local jurisdictions abound. Interestingly, there has been little in the way of formal analysis of the effect economic development incentives might have on entrepreneurial activity. This current study attempts to fill that void.Specifically, to the extent that these development incentives are applied in a manner that can mimic capital markets, this should lead to increases in entrepreneurial activity, as suggested through anecdotal evidence above. Additionally, this paper dives deeper into this issue and applies insights derived from Baumol (1990) and assesses how such development incentives might influence various types of entrepreneurship and entrepreneurial formation, specifically whether the entrepreneurship that does develop is either productive or unproductive.
Here, if development incentives are being channeled by public officials into truly economically viable outlets, i.e., those outlets that would attract private capital through market signals of profit and loss, then this should spur productive entrepreneurial activity, and ultimately foster economic growth as suggested by Holcombe (1998). However, if such development incentives are distributed as a result of political motivations and connections, then this should incentivize rent-seeking behavior and lead to the development of unproductive entrepreneurial activity, compounded through the channels suggested by Coyne et al. (2010).
Specifically, as unproductive entrepreneurial endeavors prove successful, this increases the relative benefit for others to pursue such unproductive opportunities in a potentially self-perpetuating cycle.
In other words, unproductive entrepreneurship begets more unproductive entrepreneurship. These two potential effects give rise to an interesting empirical question regarding the net effect of development incentives. This paper sets out to evaluate the extent to which such development incentives may influence entrepreneurial activity and importantly which type of entrepreneurial activity.In order to carr y out this exercise, I employ several measures of productive and unproductive entrepreneurship developed by Sobel (2008) and an index of non-tax state government economic incentive tools developed by Patrick (2014b) both of which will be discussed in greater detail below. Anticipating the results, more liberal availability of such non-tax incentives provided by state governments results in significantly lower levels of productive entrepreneurship and higher levels of unproductive entrepreneurship, with the overall effect culminating in lower net entrepreneurial productivity (the latter of which measures the returns to productive relative to unproductive entrepreneurship). These results are robust to several specifications. The policy implications stemming from these results would suggest that while proponents of economic development incentives are correct in their assessment that such incentives spur entrepreneurship, it appears that the entrepreneurship that is created is of the unproductive variety. This would suggest curbing and limiting the use of these incentives and applying more market-based approaches to fostering productive entrepreneurship.
The remainder of the chapter is organized as follows: section “Theory” develops the theory applied in the analysis, which is drawn from both Baumol (1990) and Coyne et al. (2010). Section “Data and Empirical Specification” discusses the data and empirical specification employed. Section “Results and Interpretation” presents and discusses the results along with providing policy implications that can be drawn from those results. Section “Conclusion” concludes.