Evaluating the Effectiveness of Local Economic Development Incentives Prepared by Christopher Hawkins Enterprise Florid

1. Evaluating the Effectiveness of Local Economic Development IncentivesPrepared by Christopher Hawkins Enterprise Florida Reference: Rod Hissong The Efficacy of Local Economic Development Incentives Chapter 7: Financing Economic Development in the 21st Century White S.B., Bingham R. D., and Hill Edward. W. eds. Hissong evaluates the general effectiveness of local economic development incentives by reviewing the recent literature.

2. He concludes that: There is certainly no consensus on the efficacy of incentives The literature on incentives offers contradictory results and policy recommendations Recent evidence presented in the literature supports the claim that incentives appear to play an inconsequential role in local economic development Why is this the case? Cases in the literature often site specific or are limited to one MSA Empirical results in the evaluative literature exhibit variation in the unit of measure analyzed Significant geographic heterogeneity of the subject Review of the Literature on the Effectivenessof Incentives

3. Some Significant Issues in Evaluating Effectiveness Misunderstood theories Theories are incorrectly applied, which produces a wide variation in the results of the effectiveness (such as the relationship between capital and labor). Measurements Vary Measures of effectiveness vary due to geographical differences in implementation. These measures also tend to be too narrow since they do not include a political element or community/social relations. The theory may be valid, but how studies measure economic development varies, thus the conclusions on effectiveness. Emphasis on Statistical Interpretations Studies that do not conduct a cost/benefit analysis and rely only on statistical estimates may misinterpret the economic significance of the incentive.

4. Evaluative Approaches: Recent Empirical and Methodological Evidence Evaluation of Geographically Based Incentives Various methodologies employed to test enterprise zones (Papke 1994 & others), but, the unit of measurement varies as did the locality Econometric Approach Anderson and Wassmer (2000) study is the most rigorous, but, the model still cannot control for the geographical heterogeneity across zones Hypothetical Firm Approach The Tax and Incentive Model (TAIM) employed by Fisher and Peters (1997) controls for some of the limits of previous approaches, but it requires extensive data.

5. The Conclusion: Inconclusiveness • Hissong’s review of the literature reveals that there are efforts to address the problems of evaluating the efficacy of incentives. • New empirical studies have a stronger theoretical base and are more statistically sophisticated, however, these approaches also provide contradictory results • Suggests that the Hypothetical Firm Model will be used more often in future evaluations • Also warns local economic development officials not to be overly optimistic in in improving city conditions through incentives