Bargaining and the effectiveness of economic development incentives: an evaluation of the Texas chapter 313 program

Existing research has examined how the mobility of capital shapes bargains between firms and governments. The major barriers to examining bargaining behavior include the large number of dimensions to these bargains and differences in capacity and strategies firms and governments. In this paper, I examine data from a unique economic development incentive program in the state of Texas that holds almost all elements of bargaining constant, leaving only the ability of firms to walk away from a given location during the bargaining process. Using original data on the bargaining outcome as well as elite opinions, I document the extent to which firms that chose to locate in Texas made their decisions independent of this special economic development program. My findings suggest that only 15% of the firms participating in the program would have invested in another state without this incentive. The majority of these projects, and incentive dollars, were allocated to firms already committed to investing in Texas. Case studies of over 80 projects reveal that in many cases it was an open secret that companies had already committed to their investment locations prior to receiving the incentive. This implies that structure of the program encourages the overuse of incentives.