Economic development program spending in the US: is there club convergence?

Abstract

ABSTRACT This paper provides a novel investigation of whether budgetary spending on economic development programs converges across US states. States use a wide array of tax and subsidy programs to try to attract firms in a highly competitive environment. If states engage in strategic tax and incentive competition as previous literature suggests, we should expect economic development spending to converge over time. Using a national database of state ‘out of pocket’ economic development expenditures, we apply the panel convergence method developed by Phillips and Sul (2007, 2009) which endogenously identifies the number and members of convergence clubs. We find that states flock together in three spending clubs which reflect socioeconomic characteristics. The existence of multiple clubs with heterogeneous spending patterns reveals the complexity of state-level budgetary efforts put towards economic development programs.