Clawbacks and the Administration of Economic Development Policy in the Midwest

Abstract

Over the past decade, competition for private investment among the American states has attracted much negative comment. Clawbacks have been proposed as a way of imposing controls on the provision of state economic development subsidies. Clawbacks stipulate that a publicly subsidized firm not achieving agreed-upon employment performance targets must pay back a portion of the subsidy it received. This article reviews the arguments made in favor of clawbacks and presents new data on clawback usage in major midwestern grant and loan incentive programs that indicate clawback provisions are reasonably widely used. However, there is considerable divergence in the operation and organization of clawbacks across programs, and there appears to be little agreement on how firm employment performance should be evaluated. Most directors of state grant and loan programs feel that the inherent riskiness of business should be taken into account when deciding whether clawback sanctions should be applied to under performing firms.