Working Paper 2017-10: Nathan Jensen

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10242017-WP-exit-options-negotiations

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Author:

Nathan Jensen, Professor of Government, University of Texas at Austin


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, lack of knowledge of the utility functions of both firms and governments, and differences in capacity and strategy between 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 the that structure of the program encourages the overuse of incentives.