Sharing the Gains of Local Economic Growth: Race-to-the-Top versus Race-to-the-Bottom Economic Development

Abstract

In attempting to promote economic development, states often pursue either a race-to-the-bottom approach focused on lowering business costs or a more investment-based, race-to-the-top approach that aims to increase productivity, innovation, and entrepreneurship. Whether either approach promotes growth and produces broad-based economic gains across the population is the subject of this paper. The novelty of our approach is that an extensive array of variables representing examples of the two economic development approaches are examined for their effects on various indicators of state economic performance, including income distribution, over the 2000–07 period. We find that lower taxes are statistically insignificant in explaining state economic performance, and that targeted tax incentives and financial assistance—as currently practised—are more likely to harm growth and income inequality. Some support exists for state and local governments to encourage entrepreneurship and to enhance Internet connectivity.