Lecture 20: French Classicism

Lecture 20: French Classicism

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  • cours magistral
Lecture 20: French      Classicism 17th /18th Century France / the Louvre /  Versailles – scale and refinement 1520 1750–
  • view of north front – plan and aerial view and turrets
  •  17th centuries – looking east
  • louvre c1600 time
  • pierre lescot early great french classical masterpiece – how is this different than italian work
  • into the  countryside controlling 
  • today paris under  henri iv place des  vosges

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Do More Economic Development Incentives Result in More
Jobs?
An examination of the influence of the economic development
incentives environment on county jobs in the US 1970-2000
1By Carlianne Patrick






1The Ohio State University
Department of Agricultural, Environmental and Development Economics
2120 Fyfe Road
Agricultural Administration Building
Room 103
Columbus, OH 43210
patrick.170@buckeyemail.osu.edu
Phone: 001+ (770)328-1960











October 2011 Draft Abstract
The research provides insights into one important unresolved question about economic
development incentives: does increasing the availability of public aid to private enterprise
support local employment growth? A proposed theoretical model of local employment with
incentives forms the basis for empirical implementation. Utilizing panel data from 1970-2002,
random trend models estimate US county employment level and growth effects. To strengthen
identification, a natural experiment methodology is also employed by restricting the sample to
counties that share a state border. The paper’s most novel contribution is the creation of the
Incentive Environment Index (IEI). The IEI is created from state constitutional provisions which
limit and structure the ability of state and local governmental entities to aid private enterprises.
thMost provisions originated in the 19 Century as a response to state and local financial crises
and are remarkably heterogeneous. They typically act as a constraint on the type of incentives
available in a location as well as response to economic stimuli. Identification comes from
differences in constitutional provisions and the very low probability that employment
expectations in a given county exert a significant influence for state level constitutional change.
Comparing estimation results across methods reveals that unobserved heterogeneity drives
overstatement of policy effects. The most robust estimates indicate increasing the ability of
governments to aid private enterprise has a significant negative medium-term effect on rural
county employment levels and no effect otherwise. The paper’s findings call into question the
policy of subsidizing capital in order to create jobs.
1. Introduction
Policy-makers and elected officials are constantly under pressure to enact policies
supporting local economic growth, which has only intensified in the sluggish labor market since
2000. Economic development programs aimed at job creation are the frequent response. Often
local job creation policies focus on increasing capital though economic development incentives.
Job creation, higher earnings, and tax revenues are then the indirect outcome of the new capital
formation. Although the academic literature on economic development incentives is vast, it does
not provide clear guidance on effectiveness of these policies.
Myriad methodologies, programs, and results make it difficult for interested officials to
determine best practices from the literature. Results also compete with constituent pressures to
do ‘something’ as well as with rent-seeking business interests asserting the need for subsidy
(Greenbaum and Landers 2009). Further, most studies focus only on tax incentives, a specific
program, or a single location.
Attempts to study the effects of non-tax incentives have been hampered by data
availability and methodological problems. Many lack the theoretical underpinnings to identify
the mechanisms driving their results. Since the policy response to job creation pressure is often
to create programs and spend more, it is difficult to separate their actual effects on jobs from the
simultaneous effect that local employment conditions have on programs and expenditure.
Programmatic and spending measures of economic development incentives also confound the
effects of different program types. Reliance on state level, cross-section analysis in the literature
causes concern as well. State level analysis masks certain subtleties in the local effects.
Unobserved heterogeneity may also lead to misleading results.
Constrained by these issues, the existing literature doesn’t provide a clear answer to some
important policy questions regarding economic development incentives. The research presented
herein provides insights into one important unresolved question: does increasing the availability
of public aid to private enterprise support local employment growth? A proposed theoretical
model of local employment with incentives forms the basis for empirical implementation.
1
Utilizing panel data from 1970-2002, random trend models are used to estimate US county
employment levels and growth effects. To strengthen identification, a natural experiment
methodology is employed by restricting the sample to counties that share a state border.
The paper’s most novel contribution to the literature is the creation of the Incentive
Environment Index (IEI). The IEI is created from state constitutional provisions which limit and
structure the ability of state and local governmental entities to aid private enterprises. Every state
constitution was analyzed and scored to construct an IEI for each continental US state and year.
thMost provisions originated in the 19 Century as a response to state and local financial crises
caused by participation in risky economic development projects and are remarkably
heterogeneous. They typically act as a constraint on both the type of incentives available in a
location and response to economic stimuli. Identification comes from differences in
constitutional provisions and the very low probability that employment expectations in a given
county exert a significant influence for state level constitutional change. Hence, these constraints
may limit the ability of governments to provide needed incentives—limiting growth—or allow
governments to credibly argue that they cannot offer incentives, which reduces the possibility of
them offering wasteful incentives.
Employing the IEI in annual and five-year county panels provides several interesting
results for policymakers and researchers considering economic development incentives.
Comparing estimation results across methods and panels reveals that unobserved heterogeneity
drives overstatement of policy effects. Further, constraining urban and rural counties to the same
employment process masks net differences in the presence of agglomeration and
forward/backward linkages. The most robust estimates indicate increasing the ability of
governments to aid private enterprise has a significant negative medium-term effect on rural
county employment levels and no significant effect otherwise. Urban counties may reap some
short-term level benefits, but they are statistically indistinguishable from zero in the medium-
term and when the sample is restricted to border counties.
The results call into question the policy of subsidizing capital in order to create jobs. The
2
IEI measures the ability of government to use public monies, credit, and property in the aid of
private enterprise. It is not a measure of other types of economic development programming,
such as human capital, amenities, or direct jobs programs. However, availability of programs like
Industrial Revenue Bonds, venture capital funds, loan guarantee program, etc. are directly
governed by these constitutional provisions. It is not clear whether these incentives do not result
in net new capital or whether net new capital is not jobs creating. The paper’s findings suggest
that creating more tools for governments to aid private capital is an ineffective local job creation
policy.
The paper proceeds in Section 2 by discussing key findings in the literature. Section 3
develops the theoretical model of local employment with incentives. The empirical strategy is
described in Section 4. Section 5 explains the IEI in more detail. Estimation results are presented
in Section 6 and Section 7 discusses the results. Some concluding remarks are provided in
Section 8.
2. Background
After decades of research, there is no clear consensus on the effects of economic
development incentives competition (see Thomas 2007, Glaeser 2001, and Bartik 1991 for
similar literature survey conclusions). Data and methodological issues are pervasive in the
literature. Many studies focus only on tax incentives or restrict their attention to a specific
location or program. The effect of non-tax incentives on employment outcome is relatively
understudied. This section highlights key insights from the existing literature.
The literature on tax competition and tax incentives has a long history and is far too large
to fully review. Wasylenko (1997) /Netzer (1997), Fisher (1997), Buss (2001), and Bartik (2005)
review the existing empirical tax incentive literature and reach similar conclusions. The
relationship between taxes and economic growth is not clear. Studies report positive, negative,
and insignificant relationships. Methodological, causality, and data issues make it difficult to
draw conclusions. The author’s also note that most research on tax incentives fails to control for
3
the level of public services and expenditures associated with the tax levels. They indicate failure
to account for other growth factors, such as agglomeration, economies is also a problem. Tax
research tends to rely on static models without accounting for time dynamics and path
dependency. These issues lead to erroneous results about the relationship between taxes and
growth.
The review authors note that more careful studies tend to find small or insignificant
effects. The dynamics of competition have been postulated as one reason for lack of effect.
Competition causes states to replicate programs in other states. As a result, each state now offers
a variation of almost every possible tax incentive (Chi and Leatherby 1997; Buss 2001). In fact,
Papke’s (1995) study found that after-tax returns on investment were so similar in six Great Lake
states that one could not be preferred. These findings substantiate theoretical predictions in many
tax competition models (see Wilson 1999 for a thorough review). Tax competition and incentives
competition models often predict that the dynamics of competition will cause locations to match
bids until location’s relative positions are unchanged (Guisinger 1995; Ellis and Rogers 2000;
Patrick 2011)
In order to avoid the aforementioned problems, some incentive researchers choose to
study the effect in one location, the outcomes of one program, or establishment level impacts.
Goodman (2003) conducts general equilibrium analysis of the overall effect of incentives in one
city. He finds that, although some jobs were created, the benefits accrued to in-migrants and
investors while the existing taxpayers suffered negative fiscal consequences. The typical
approach is to study a single program in isolation (Greenbaum, Russell, and Petras 2010). For
example, Schwartz, Pelzman, and Keren (2008) examine the effects of direct subsidy programs
in Israel and Puerto Rico. They report the programs did not achieve the desired results and were
costly to the governments. Gabe and Kraybill (2002) study the effect of an Ohio program on
establishment level employment. Interestingly, their findings suggest that program participants
actually created less jobs and point to rent-seeking as a possible explanation. On the other hand,
Greenstone, Hornbeck, and Moretti (2010) estimate very large incumbent firm productivity
4
increases associated with the successful attraction of incentivized firms.
Although these studies give insight into the possible effects and mechanisms of economic
development incentives, they do not provide generalizable conclusions. There are few studies of
non-tax incentives and aggregate level employment effects. Again, data and methodological
problems lead to concerns about the validity of the results. For example, deBartoleme and
Spiegel (1997) and Goss and Phillips (1997) find a positive relationship between state economic
development spending and job growth. As will be argued in the empirical implementation
section, spending is likely endogenous and includes programs which fall outside the capital
creating jobs paradigm.
Rather than spending, OhUallachain and Satterthwaite (1992) use tax rate measures,
Industrial Revenue Bond (IDB) financing, and program dummy variables. They find only the
dummy variables for Enterprise Zones and University Research Parks have a positive statistical
relationship with employment growth. Recognizing the limitations of their empirical approach,
OhUallachain and Satterthwaite are careful not to claim causation. Goetz et al. (2011) create
measures of the share of all possible programs available in states. They find tax incentive and
financial assistance programs may harm growth rather than help.
As critics of tax competition studies have also argued, non-tax incentive studies which do
not control for other employment growth factors and time dynamics may lead to questionable
results. With a few notable exceptions, the aforementioned job-incentive studies lack a
theoretical underpinning to adequately control for other job creation mechanisms. Goetz et al.
(2011) root their work in spatial equilibrium theory, which explicitly considers the locational
effects of policy. However, they do not fully specify and derive the model. deBartoleme and
Spiegel (1997) do fully develop a model of equilibrium labor change under incentives. The
model is in the static neo-classical growth tradition, though, and does not consider any feedback
effects. The deBartoleme and Spiegel (1997) model does illustrate the general idea behind
incentives – increase employment in a location by increasing the amount of capital.
Whether explicitly stated or not, the premise underlying many incentives is that
5
increasing the amount of capital in a location will increase employment. Neo-classical, spatial
equilibrium, tax competition, and agglomeration theories for incentives share this foundation.
Eisinger (1988) discusses rapid universal acceptance of the jobs and wealth through capital
model. The fundamental rationale of inducing private capital investment to create jobs and
wealth is largely unquestioned. He describes the public and private benefit models in some
detail. Updating his public/private benefit relationships with more recent insights, the general
concept behind incentives is illustrated in Figure 1.

Figure 1: The Concept of Economic Development Incentives
The hope is that induced increases in capital are greater than the decreases. If incentives
don’t result in net capital increases, then there may be a number of explanations including
displacement, revenue shortfalls, and/or incentivizing already-locating capital. As Figure 1
shows, the model implicitly assumes increasing capital will result in new jobs and payroll.
However, increasing capital may have productivity effects reflected in wage increases. The
relative slopes of the labor supply and demand curves determine which, if any, of these effects
actually occur (in the absence of tax and service effects).
Figure 1 is merely a summary of the generally accepted conceptual framework for
economic development incentives. It is not a theoretical model from which an empirical model
6
may be derived. The next section develops such a model.
3. Theoretical Model of Local Employment with Incentives
Building upon the spatial equilibrium models of Roback (1982), Gyourko and Tracy
(1989), and Brown, Hayes, and Taylor (2003), the theoretical model herein focuses on the
employment location choice. The model is also informed by recent developments in dynamic
household sorting models such as Bayer et al. (2009). Equilibrium employment results from firm
and individual optimization of the expected future value of employment location decisions.
3.1 Spatial Equilibrium with Incentives
Consider an individual’s period utility described by:
(1) U = U(q, N, L , A ,G ) , hj j j
where q is the quantity of goods consumed by the representative individual, N is the quantity of
land consumed by the individual, L is the quantity of labor supplied and equals unity if worker hj
1is employed and zero if the work is unemployed , A is a vector of natural amenities found in the j
jurisdiction j, and G is a vector of state and local government services. j
The individual’s budget constraint is given by:
(2) P(1+τ )q+ n (1+τ )N = w L (1−τ )+ Y (1−τ ) , sj j nj j hj wj yj
where P is the national price of good q, τ is the sales tax rate in the jurisdiction, n is the rental jsj
rate for land, τ is the land rental tax rate imposed by the state and local governments in nj
jurisdiction j, w is the wage rate in jurisdiction j, τ is the tax rate on wages, Y is nonlabor j wj
income, andτ is the tax rate on nonlabor income imposed by the government in j. Combining yj
(1) and (2) gives an expression for the period indirect utility function:
(3) V = V (w L (1−τ ),Y (1−τ ), P(1+τ ),n (1+τ ), A ,G ) . j j hj wj yj sj j nj j j
Now, assume individuals’ choose L , the labor they supply in location j given the wage hj
rate, taxes, amenities, and public services in location j. Further assume that individual’s are

forward looking and choose a sequence {L } that solves hjt t=0

1
The subscript h is used to differentiate labor supplied by individuals from the labor demanded by firms.
7
∞ t
(4) max E{ φ [V (w L (1−τ ),Y(1−τ ), P(1+τ ),n (1+τ ), A ,G )]}, ∞ ∑ jt hjt wjt yjt sjt j njt j jt{L } t=0hjt t=0
where is a discount rate between 0 and 1.
∞* *If we assume a Markov structure, the optimal decision rule L ={L } is a function of hjt hjt t=0
only the states. Since the individual is choosing the optimal labor location given the wage rate,
taxes, amenities, and public services, these are natural candidates for state variables.
Let S = (P, w ,τ ,τ ,τ , n ,τ , A ,G ) be the set of state variables in location j at jt jt wjt yjt sjt jt njt j jt
*
time t. When the sequence of decisions is made according the optimal decision rule L (S ) , the hjt jt
lifetime expected utility from supplying labor to location j becomes the value function:
(5) V = max {V (S )+φE[V (S , L )]} hjt L jt hj,t+1 j,t+1 hjthjt
2
s.t. S = g(S )=γ S . j,t+1 jt jt jt
Spatial equilibrium tells us that if individual h is working in location j at time t, then
(6) V ≥ V ∀k ≠ j,∀t,h . hjt hkt
In the long run, labor mobility will guarantee constant, equal expected utility across
locations such that:
(7) V = V ∀h, j,t . hjt ht
If the problem is infinite, then the function doesn’t depend upon time and we can drop the
time subscripts and solve the recursive problem without any uncertainty. Applying the Kuhn-
Tucker conditions, the envelope theorem and substituting yields an optimal labor location
decision that solves
* *
(8) 0= D V (S , L ) . 2 hj j hj
* *
Let L (S ) be the unique solution to (8). hj j
Similarly for a firm, production in each jurisdiction can be described as:
(9) Q = Q(L , K , N , M , A ,G , R , I ) . j fj fj fj j j j j fj
where Q is the output of the good in jurisdiction j, L is the quantity of labor employed in the fjj

2 This specification of the transition function implies state variables change at a location and time specific rate. No
other assumptions about the progression of state variables are made.
8