Theory

The rationale behind economic development incentives tends to revolve around the effect they will have on economic growth for those juris­dictions employing them. Tied to this, is a strong desire to promote entrepreneurship within a jurisdiction, to encourage economic growth and development.

Baumol (1990) indicates that there are several types of entrepreneur­ship: productive, unproductive, and destructive. Productive entrepreneur­ship is of the sort that is tied to market activity and channeling productive yet scarce resources to their highest valued use, driven by market prices and the profit and loss signals that result from that. This sort of entrepreneurship tends to promote economic growth and wealth creation, ensuring that resources are channeled to their highest valued use, and creating opportunities for more entrepreneurial activity to develop (Holcombe 1998). Unproductive entrepreneurship is of the sort that results from rent-seeking behavior associated with the polit­ical process. This form of entrepreneurship results in the transferring of resources and wealth rather than its actual creation.

Importantly, both types of entrepreneurship can be influenced by the relative payoffs and network effects that develop due to each type of entrepreneurship and accrue to the entrepreneur from either source (Coyne et al. 2010; Holcombe 1998). Specifically, the emergence of either type of entrepreneurship creates niche opportunities for addi­tional entrepreneurs to pursue opportunities related to the initial profit opportunity and thereby provide new and innovative services tied to either form of entrepreneurship. As this process unfolds and the network effect is extended, it further changes the relative payoffs associated with either productive or unproductive entrepreneurship.

This has important ramifications for economic development incentives. As noted, the anecdotal evidence (and academic literature that has evalu­ated these incentives) tends to consider the impact they have on economic outcomes like growth and job formation. Further, while a significant amount of anecdotal evidence suggests that fostering entrepreneurial activity is considered an important function being performed by these incentive deals, little formal work has been done to evaluate exactly how successful they are at promoting this goal. These issues surrounding the effect entrepreneurship has on the relative profitability of consecutive entrepreneurial ventures along with the theory discussed above provide an important empirical question.

First, given the above it would be expected that as the prevalence and ease with which economic development incentives grow, this would increase entrepreneurial activity as proponents of such incentives would hope to achieve. However, a second and highly relevant question then is if this situation ultimately promotes the development of productive or unproductive entrepreneurship. To the extent that economic develop­ment incentives are capable of efficiently allocating capital to their highest valued use, then this should increase the relative payoff for pursuing productive entrepreneurial activity. In other words, the availability of such resources would act akin to another channel through which capital could be obtained for financing productive activities and would ultimately foster economic growth.

On the other hand, to the extent that such incentive packages and the ease with which they can be offered are ultimately allocated through the political process and political bargaining, then this would shift the rela­tive payoff toward the pursuit of more rent-seeking activities and would ultimately foster the expansion of unproductive activities.

While no academic research has evaluated these issues specifically, a number of academic studies have considered various other political economy issues behind economic development incentives. This research tends to find that larger, more politically powerful firms capture many of the benefits stemming from economic development incentives, creating significant economic inefficiencies. For instance, Greenbaum and Landers (2009) discuss how most incentive programs tend to be far too broad upon passing and then expand further after adoption, relative to what optimal theory would suggest. They attribute this to the logrolling neces­sary for enactment. Further, Jensen et al. (2015) suggest that while the uncertain economic benefits of development incentives are clear, the elec­toral incentives facing public officials provide a compelling rationale for their proliferation.

Finally, a considerable literature assesses the rent seeking and institu­tional aspects of economic development incentives. For instance, Jensen et al. (2015) find that elected mayors tend to be associated with signifi­cantly larger incentive awards and weaker oversight relative to appointed city managers. Jansa and Gray (2016) find strong evidence that relatively larger firms making larger political contributions and incurring higher lobbying expenditures are more likely to receive development incen­tives. Overall, these political economy issues tend to further dampen any positive effects associated with targeted development incentives.

In summary, the above literature would suggest that relatively more unproductive entrepreneurship would be expected to emerge, however, this result is far from clear. To the author's knowledge there has been no formal evaluation of the type of entrepreneurial activities that ultimately result from economic development incentives. Therefore, the remainder of the paper is devoted to addressing these issues.