Association for Public Policy Analysis & Management

Discretionary subsidies are one popular economic development tool that state governments use to attract and keep firms in their region. Instead of enacting a tax credit, which would apply to all like firms, the state will broker a deal with one specific firm. These subsidies have been highly contested, both for their size and a lack of oversight and accountability. Although politicians cite job creation as the motivating factor, the magnitude of subsidies suggest that there are other forces at play.

The possibility that politicians maximize future political capital could help explain the magnitude of these discretionary subsidies. In this paper, I test for a relationship between government subsidies for firms and corporate political contributions to state politicians. If a governor can increase the amount of campaign funding they receive in their next election cycle by increasing spending on a few large corporations, subsidies would be higher than predicted if the governor only cares about the employment and welfare of their constituents. The question remains. is there a "quid pro quo" between firms and politicians which is inflating the size of corporate subsidies?

To answer this question, I have matched firms across two data sets: the set of corporate campaign contributions at the state levels and the set of state subsidies for corporations. I also link the individual contributions of CEOs and other company executives to the subsidies their company received. My data set tracks the locations and employment of all establishments of a firm across time, as well as the subsidies received and the contributions made.

This paper explores one possible mechanism to explain the magnitude of state subsidies for corporations. The results will serve to inform the state economic development policy discussion.