Local Public Policies and Interregional Business Development

Abstract

A key consideration in the formulation of local government public policies is their expected influence on economic development. There is limited information on the sensitivity of economic development to specific local policies, and fearing the worst, policymakers are prone to oppose actions which appear to raise business costs, such as taxes, and fail to give full consideration to offsetting benefits which are often derived from expenditures. Through these actions local governments can be perceived as engaging in tax competition, using a mix of strategies and employing tools such as infrastructure, tax structure, and public services. Differing views on whether such competition promotes efficiency have been espoused. Public finance economists have frequently stated that tax competition is counterproductive, though McLure [8] and others have argued that its benefits are likely to be substantial. Whichever view is eventually supported, the issue remains whether the competition and resulting choice of public policies actually influence business locations and start-ups. The current paper is a comprehensive, consistent examination of the effects of a wide-ranging set of local public policies on interregional business location and start-up decisions. Aspects of the contributions offered by this paper have been included in the work of other authors, but no previous work has provided a systematic examination of the issues. First, this research, though confined to an individual state, is interregional as it measures the effect of public policies across wide geographic areas, including seven metropolitan areas and numerous rural counties. Second, the basis for analysis is firm-specific locations and start-ups which are measured using unemployment insurance records covering all industries. This allows for analysis of industry locations across all sectors. Bartik [1] and Carlton [4; 5] use firm level data for manufacturing industries and selected subsectors. The data used here permit analysis of actual firm locations across all industries and allow a distinction to be made between firms entering the economy, firms expanding or contracting, and those exiting the economy. Other researchers, such as Wasylenko and McGuire [15], study determinants of manufacturing and nonmanufacturing employment, but the data are for net employment changes, and as a result are not specific to newly locating firms.