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Fleeing a Lame Duck: Policy Uncertainty and Manufacturing Investment in US States

Author

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  • Nathan Falk
  • Cameron A. Shelton

Abstract

It is found that electorally-induced policy uncertainty decreases manufacturing investment in US states. In a state with average partisan polarization, the elasticity of election-year investment to a specific measure of policy uncertainty is -0.027. When the incumbent governor is term-limited, there is greater uncertainty over the outcome, providing an instrument to demonstrate this effect is causal, not simply coincidental. Moreover, manufacturing investment does not rebound following the election. Rather, own-state uncertainty is associated with a large and significant coincident rise in neighboring states' investment. These findings suggest that policy uncertainty at the sub-national level drives investment to alternate sites.

Suggested Citation

  • Nathan Falk & Cameron A. Shelton, 2018. "Fleeing a Lame Duck: Policy Uncertainty and Manufacturing Investment in US States," American Economic Journal: Economic Policy, American Economic Association, vol. 10(4), pages 135-152, November.
    • Handle: RePEc:aea:aejpol:v:10:y:2018:i:4:p:135-52
    Note: DOI: 10.1257/pol.20160365
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    Citations

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    Cited by:

    1. Lucas, David S., 2024. "The effect of regime change on entrepreneurship: A real options approach with evidence from US gubernatorial elections," Journal of Business Venturing, Elsevier, vol. 39(4).
    2. Boumans, Dorine & Gründler, Klaus & Potrafke, Niklas & Ruthardt, Fabian, 2024. "Political leaders and macroeconomic expectations: Evidence from a global survey experiment," Journal of Public Economics, Elsevier, vol. 235(C).
    3. Zonaira Akbar & Malik Fahim Bashir & Yasir Bin Tariq, 2021. "An analysis of political uncertainty and corporate investment cycles in Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 55(6), pages 2271-2293, December.
    4. Barraza, Santiago & Civelli, Andrea, 2020. "Economic policy uncertainty and the supply of business loans," Journal of Banking & Finance, Elsevier, vol. 121(C).
    5. Dorine Boumans & Klaus Gründler & Niklas Potrafke & Fabian Ruthardt, 2021. "The Global Economic Impact of Politicians: Evidence from an International Survey RCT," EconPol Working Paper 56, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    More about this item

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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