Institutional and Political Determinants of Incentive Competition

Abstract

Incentive competition is on the rise. It is costly, generally inefficient, and often ineffective even for the winning regions. Yet some regions do very well by attracting large, new facilities that create sustained jobs, bolster the tax base, and have multiplier effects. The nation states of Europe have developed an effective regulatory system that curtails abuse, but the United States, Canada, and Australia have grappled with forms of cooperation and regulation less successfully. Incentive competition is spreading to developing countries, especially as responsibility for and fiscal capacity to support economic development have devolved to subnational levels of government. Local governments also compete for mobile capital, export-oriented as well as retail. Incentive competition for capital is an increasingly important public policy issue, because it consumes considerable resources, alters the spatial distribution of economic activity, and entails large opportunity costs for citizens and businesses.

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