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Do Economic Development Incentives Work?

By Caleb Taylor

How effective are Arkansas’s economic development incentives?

Not very, according to ACRE Research Fellow Erica Smith in an op-ed published on May 11 in Arkansas Business entitled “Arkansas’ Ineffective Incentives.”

Smith writes about the economic literature on economic development incentive programs such as Arkansas’s Quick Action Closing Fund (QACF) and concludes that the return on investment from such programs don’t match up with the alleged benefits claimed by proponents.

Smith writes:

The QACF disbursed almost $134.8 million between October 2007 and June 2019, state figures show. With such money being spent, we should ask if this program is worth its cost. The governor and the AEDC commonly publicize new grants from this fund, and each press release typically estimates the amount of job creation and future investment expected to result from the allocation of our tax dollars. For example, in 2019 the Arkansas Times detailed Radius Aerospace’s plan to expand a factory and create 65 jobs with the help of $300,000 from the QACF. Empirical evidence generally does not support the claim that these programs create jobs. Stephen Goetz of Penn State University, Mark Partridge and Shibalee Majumdar, both of Ohio State, and Dan Rickman of Oklahoma State University found that these policies were associated with lower statewide job growth from 2000-07.”

A forthcoming paper entitled “Do Politicians Use Targeted Economic Incentives for Political Gains? Evidence from Arkansas Gubernatorial Elections” co-authored by Smith, ACRE Affiliated Researcher and UCA Lecturer I of Economics Jacob Bundrick, and UCA Assistant Professor of Economics Dr. Weici Yuan examines the question of whether there’s a connection between gubernatorial re-election and which counties get economic development incentives.

Smith is one of the fellows in ACRE’s inaugural summer fellowship program. She and other fellows will continue to work on research with a mentor, participate in an online reading group, and professional development training. She will also continue to be a tutor for econometrics.

Smith was also recently named economics student of the year by the UCA College of Business.

For more of ACRE researchers’ work on targeted economic development incentives, go here.