Electoral institutions and electoral cycles in foreign direct investment

Working Paper 2016-05: Jensen, Findley, and Nielson

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Through a field experiment and audit study we test prominent arguments about the political-business and political-budget cycles. We explore how electoral timing, direct elections, and party composition affect local governments’ offers of investment incentives to outside firms. To minimize deception, we legally incorporated a consultancy and, on behalf of a real investor in manufacturing, approached roughly 3,000 U.S. municipalities with inquiries. The main experimental results show no greater tendency to offer incentives for investment anticipated prior to than after elections – a null result that is estimated with high precision. Limiting the sample to municipalities that specialize in manufacturing suggests that election timing matters in this most likely set of locales. Some observational findings include mixed evidence on how direct elections of executives and the seasons in which elections occur are related to incentives. Finally, our evidence suggests that larger, Republican-controlled municipalities more readily offer investment incentives than their Democratic counterparts. Our results suggest limited support for political cycles in driving incentive policies, but uncover other political factors that shape economic development practices.