Bargaining,Networks,and Management of Municipal Development Subsidies

Abstract

This article investigates why cities use fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis to manage offers of economic development incentives to business. We advance an approach to understanding economic development subsidies and control mechanisms that integrate political bargaining and network theories. Municipal bargaining power, institutional incentives, and organizational networks are hypothesized to influence development subsidy decisions. The results confirm that local governments’ bargaining power and political institutions influence the degree to which cities use fiscal analyses. In addition, public/private organizational networks that bridge public and private sectors by linking quasigovernmental organizations and local governments increase information and credibility thus leading to greater use of fiscal analyses.

Keywords

economic development subsidy control bargaining organizational networks

Introduction

How do local governments manage economic development and other programs that subsidize private interests? During recent decades, many local governments have tried to stimulate economic development by offering tax incentives and other business subsidies (Fleischmann & Green, 1991; Koven & Lyons, 2003; Sullivan & Green, 1999). Subsidies are generally granted based on an expectation that new businesses will increase jobs and raise the local tax base (Bartik, 1995). However, there is an accumulation of evidence that local governments provide subsidies indiscriminately, and these subsidies often result in little additional employment, income, or fiscal benefits (Feiock, 2002; Koven & Lyons, 2003) or spur zero-sum or negative-sum competition (Reese, 1991; Reese & Rosenfeld, 2004; Sharp, 1990; Vogel, 2000). However, some cities are more selective and discerning in responding to business requests for development subsidies. By instituting control mechanisms such as cost–benefit analysis and/or fiscal impact analysis, local governments can reduce adverse selection problems in granting development incentives and assess whether the development benefits of a requested subsidy outweigh its costs (Sullivan, 2000, 2002; Sullivan & Green, 1999).

The literature suggests that political incentives of local government officials, business and government bargaining positions, and the nature of the competitive environment they operate in may be important in determining whether cities uncritically grant concessions to firms (Bartik, 1995; Blais, 1986; Cashin, 2000; Feiock, 2002; Helms & Gutierrez, 2007; Marlin, 1990; Reese, 1991; Rubin & Rubin, 1987; Sharp, 1990). A crucial element that has not been addressed in the literature is the organizational network relationships within which a local government is embedded. Network relationships have been found to influence policy decisions in social services, education, and water management (Meier & O’Toole, 2002, 2003; Provan & Milward, 1995; Schneider, Scholz, Lubell, Mindruta, & Edwardsen, 2003).

This article advances and tests an integrated model of local government subsidy decisions to explain the extent to which cities subject their subsidy decisions to fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis and identifies the role that network relationships play in these decisions. The next section of this article discusses the nature of the political decision calculus for business subsidies and the roles of political institutions, bargaining positions, and the extent of local government’s public, private, and nonprofit development organization networks. After advancing an explanation for how networks can provide information and enhance the credibility of commitments, we describe the national survey that provides the data for our analysis. The results of an ordered logit model highlight the roles of local governments’ bargaining position and network relationships with nonprofit/quasigovernmental development organizations in limiting subsidies to businesses. The implications of these findings for theory and practice are then identified.

Development Subsidies: Concessions and Constraints

The pioneering work of Green and Sullivan and their associates has enhanced our understanding of how local governments manage and constrain business subsidies (Fleischmann, Green, & Kwong, 1992; Green, 1995; Sullivan & Green, 1999, 2000, 2002; Sullivan & Green, 1999). Although many local governments provide businesses with subsidies,¹ they may also apply subsidy control mechanisms to reduce risks of loss from adverse selection and opportunistic behavior by firms (Miller, 1992; Reese & Rosenfeld, 2004). The most common mechanism for this purpose is to conduct fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis to determine whether particular projects are worthy of subsidies (Sullivan, 1999, 2002).² These fiscal analyses are designed to determine businesses’ eligibility for subsidies and reduce uncertainty by estimating how much a prospective business would benefit a local government (Sullivan, 2002).

Although cost–benefit analysis and fiscal impact analysis would seem to be a good idea generally, systematically applying these mechanisms can place a community at a disadvantage for attracting new investments. Typically, local governments do not receive a subsidy request until a firm has narrowed its search to a few communities. Often communities are given very little time to make a decision on the subsidy request after they are chosen as one of the few potential sites for a firm. Systematic cost–benefit or fiscal impact analyses are complex, demanding tasks requiring substantial time and expertise. Thus, requirements for detailed analysis might eliminate a city as a contender in some instances, especially if other communities can respond more quickly to requests for assistance (Sullivan, 1999).

However, absent analysis, incentives may over- or undersubsidize development, and thus cost–benefit analyses and fiscal impact analyses tend to be politically charged.³ This article builds on studies of subsidy controls and institutional incentives as well as political economy models of bargaining among local governments and private firms (Feiock & Steinacker, 2003; Hawkins & Andrew, 2010; Steinacker, 2002, 2004). We extend this work by identifying how governmental response to subsidy demands by business is shaped by the network structures in which local governments are embedded.

Networks and Political Bargaining

Bargaining models regard local policy as a function of conflicting interests among various actors (Peterson, 1979). Steinacker (2002, 2004) extends this approach by demonstrating how political factors and institutions shape political risk aversion and time horizons of local decision makers. Some local governments control business subsidies through formal written criteria and institutionalized processes (Sullivan & Green, 1999), but their applications may depend on support in formal and informal networks. Thus, the bargaining power of local governments on subsidies and their controls are anticipated to depend on the networks in which a government is embedded. Using this logic, three types of networks are identified: private, public/private, and public organizational networks.

Local governments and businesses bargain as strategic actors seeking to realize different goal functions (Ledebur & Woodward, 1990; Peterson, 1979; Wolman & Spitzley, 1996). The parties have incentives to act opportunistically (Feiock, 2004; Steinacker, 2002), but a local government’s bargaining position relative to business is strengthened or weakened by its political institutions and fiscal and administrative capacities. Network relationships complement these effects through access to strategically valuable information and strengthening of the credibility of commitments and thus bargaining positions. The following sections elaborate this framework focusing on three sets of factors anticipated to influence the extent to which local governments apply fiscal analyses such as cost–benefit analysis and/or fiscal impact analyses: the incentives resulting from local political institutions, the actors bargaining strength based on political and economic circumstances and the development resources of governments and business, and the types of interorganizational network relationships in which local governments are embedded.

Political Institutions

Under different political institutional arrangements, decision makers may approach incentives and negotiation in different ways, particularly depending on the political risks of not making a deal and the time horizon for making the deal (Clingermayer & Feiock, 2001; Wolman & Spitzley, 1996). Specific governmental institutions strengthen or weaken a local government’s bargaining position when negotiating incentives with business and thus influence the likelihood that local governments will conduct or forgo analysis.

Mayor-council government

If the incentive structure induced by the form of government leads to shorter time horizons, local decision makers will be less likely to use fiscal analyses to evaluate incentives. Extant literature suggests that in mayor-council governments, strong mayors are sensitive to the political risk aversion of missing development opportunities and thus are unwilling to take any actions that might deter new development (Steinacker, 2002). Frequent election cycles provide elected mayors with a high-power incentive for reelection, leading to a shorter time horizon than appointed officials (Weimer & Vining, 2004). Their time horizon also reflects the time period over which project costs and benefits flow, with short time horizons leading elected mayors to pursue overdevelopment (Wolman & Spitzley, 1996). Accordingly, elected officials may be reluctant to apply cost–benefit analysis or fiscal impact analysis to projects with strong political constituencies. As a result, local politicians may prefer to give subsidies to large, highly visible projects uncritically. Where the business community is well organized and influential, elected officials may seek to accommodate business demands (Lubell, Feiock, & Ramirez, 2009). Stringent fiscal analysis might impede elected officials’ ability to champion highly visible projects or projects supported by organized interest groups. Therefore, political risk aversion and electoral incentives are expected to lead cities with mayor-council form of government to apply fiscal analyses less often.

Appointed managers in council-manager governments, however, may have a stronger predisposition toward policy innovation than elected mayors because appointed managers are inclined to concentrate on developing career opportunities through efficient management (Clingermayer & Feiock, 2001). Thus, for appointed managers, efficiency may be a more important goal. Accordingly, they will prefer to apply fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis for efficient management. From this perspective, cities with council-manager governments are expected to more frequently apply fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis than cities with mayor-council governments.

Hypothesis 1a: Cities with mayor-council form of government will apply fiscal analyses to incentives less than cities with council-manager government.

Professional administrator position

Regardless of the form of government, professional administrators may promote fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis in development decisions. Many routine or specific decisions are the province of professional administrators (Reese, 1993). Reliance on a professional administrator position is regarded as efficiency-enhancing because it replaces political incentives with lower power bureaucratic incentives (Clingermayer & Feiock, 2001; Feiock & Park, 2005). Moreover, in terms of individual benefits, a record of efficient management and fiscal conservatism can also provide career opportunities for professional administrators to move to local governments that propose better conditions (Feiock, Clingermayer, Stream, McCabe, & Ahmed, 2001). They might take advantage of fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis as a tool to control businesses and promote efficiency. Professional administrators were once located primarily in council manager governments but now may operate in mayor council governments as well (Frederickson, Johnson, & Wood, 2004; Svara, 1999). Therefore, cost–benefit analysis will be applied more frequently if professional administrators play an important role in economic development decisions. The anticipated institutional effects are reflected in the following hypothesis:

Hypothesis 1b: Cities with a professional administrator that plays a pivotal role in decision making for economic development will apply fiscal analyses to incentives more than cities where the professional administrator plays a relatively less important role in decision making for economic development.

Municipal Bargaining Power

Bargaining outcomes between governments and businesses are shaped by governmental priorities and capacities as well as the economic environment in which they operate. Government bargaining positions may differ depending on relative size, utility of the given circumstance, and resources between local governments and businesses, rather than stable balance. For example, business’s bargaining power is dominant in central cities with a strong market position (Swanstrom, 1985). Businesses will often seek to control information and thus avoid governments undertaking extensive fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis. However, cities with an attractive site appealing to local investors or mechanisms of strong popular control and public intervention can have bargaining advantages over businesses (Kantor an Savitch, 1993). In this circumstance, local governments can attempt to apply fiscal analyses more stringently and frequently.

We distinguish the bargaining position depending on relative advantages based on political and economic circumstances and development resources. The strength of a local government’s bargaining power relative to business will depend on its development, priorities, financial and technical resources, and experience and expertise (Feiock, 2002; Reese, 1991). Some cities have specialized knowledge, skills, and resources that give them an advantage when dealing with business. Local governments in which economic development is a high-priority activity and which have accumulated experience in a variety of development policies will have greater bargaining capacity and thus will be more likely to apply fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis. In addition, wealthy cities with a high quality of life will not be as desperate to attract businesses. In addition, businesses’ bargaining power to limit the use of fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis likewise depends on whether they have alternative communities in which they can locate (Steinacker, 2002).⁴ Businesses will often cultivate political relationships and express a desire to invest within the border of multiple jurisdictions. Thus, a firm may be able to take advantage of economic decline in a community and bargain hard knowing their bargaining partner will be desperate to stimulate the local economy (Becker, 1988; Reese, 1991, 1993).

Governments’ Bargaining Position

Importance of economic development

In times of economic stress, some local governments enthusiastically recognize the importance of local economic development due to citizens’ or interest groups’ demand and/or experts’ suggestions. These demands and suggestions provide local governments and their decision makers with a motivation to devote themselves to economic development. Therefore, the importance of economic goals in a community will shape local government’s willingness to accommodate subsidy demands. Policy makers in local governments cannot easily target subsidies to the businesses most likely to be affected because businesses and governments usually have different goals and businesses have powerful incentives to behave opportunistically (Bartik, 1995). Therefore, local governments create business subsidy controls to minimize social and budgetary waste. If a local government makes economic development a priority, it devotes resources and develops expertise in the economic development process. If economic development is a priority activity, local officials may be better able to identify where they can apply fiscal analysis without great risk of losing investments.

Hypothesis 2a: Cities which place a higher priority on governmental economic development activities will apply fiscal analysis to incentives more than cities in which governmental economic development is a low priority.

Business subsidy experience and expertise

Local governments have to interact with businesses that have different goals and behave opportunistically. Therefore, these governments attempt to control and promote businesses to generate positive effects for the local economy. Local governments accumulate administrative and technical expertise based on experience with the bargaining and subsidy process. In general, the number of incentive policies that a city offers produces more opportunities for local governments to interact with firms. The trial and error of carrying out a variety of incentives can provide both theoretical and practical foundations to local governments. Therefore, through experience and learning from a variety of incentive policies, local governments can eventually learn better bargaining positions and strategies for interaction with businesses and can develop bargaining advantages (Reese, 1993; Rubin & Rubin, 1987). Moreover, their expertise and experience may allow them to conduct fiscal analysis in a more timely fashion to reduce political risk.

Hypothesis 2b: Cites that provide a wider array of development incentive programs will apply fiscal analyses more than cities providing a more narrow set of incentive programs.

Economic conditions

Previous studies find that as the unemployment rate increases or income (per capita or below the poverty line) decreases, strategies for economic development increase (Feiock & Clingermayer, 1992; Fleischmann et al., 1992; Sharp, 1991). High-income communities do not have a desperate need to develop the local economy and therefore can wait to make sure the benefits of granting a subsidy exceed the costs to the community for the new development. However, poorer local governments may often be unable to apply fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis to development subsidies and may be willing to take any deal offered because of their economic need (Reese, 1991; Rubin & Rubin, 1987).

Hypothesis 2c: Cities with higher median household income will apply fiscal analyses to incentives more than cities with lower household income.

Businesses’ Bargaining Position

The rate of economic growth

As local politicians tend to view economic growth as collective goods that contribute to their reelection (Cable, Feiock, & Kim, 1993), they choose policies or strategies that can redound to their own political advantage (Peterson, 1981). Therefore, slow economic growth leads to political risk, which then promotes political support for economic development activities (Wolman & Spitzley, 1996). Accordingly, slow economic growth and short-term development needs lend an advantage to businesses’ bargaining position. As a result, communities experiencing slow or declining growth will be less likely to use subsidy controls such as cost–benefit analysis and/or fiscal impact analysis. The rate of economic growth of local governments can provide businesses with an important signal of weakness in government’s bargaining, leading business to make high demands and not to provide a sufficient time frame for considered analysis.

Hypothesis 2d: Local governments with a high rate of economic growth will apply fiscal analyses to incentives more than cities with low growth.

Existing businesses focus

Existing business is expected to have a stronger position in relation to cities in bargaining over new businesses because they have better information and support from local constituencies. Local governments and businesses exist in political relationships over time and their relationship tends to become symbiotic. Businesses that are already located in the community maintain an existing relationship with local governments and have allies in the community, thereby enhancing their political bargaining position compared with businesses lacking these relationships and constituencies. In addition, existing businesses are current employers and taxpayers. As the businesses have already developed attachments and loyalties, it might be easier for a business to stay and expand rather than to relocate operations (Koven & Lyons, 2003). Accordingly, as local governments focus on retaining existing businesses for economic development, they are less likely to use fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis.

Hypothesis 2e: Cities that target efforts to existing businesses will apply fiscal analyses to incentives less than cities which target new businesses.

Governmental alternatives

Peterson (1981) argues that local governments have a unitary interest in attracting economic activity. Therefore, cities constantly seek to upgrade their economic standing and compete with one another so as to maximize their economic position. In the bargaining process, competition with other local governments can be exploited by private firms for their own advantage (Feiock, 2004). Competition between local governments for economic development can lead decision makers to offer more generous incentives to businesses. If there is delay or reluctance in subsidizing their investment, businesses with competing offers can threaten to shift to another government (Ledebur & Woodward, 1990). As a result, local governments may be reluctant to impose fiscal analyses such as cost–benefit analysis and fiscal impact analysis before acting.

Hypothesis 2f: Cities that compete with other local governments for economic development will apply fiscal analyses to incentives less than cities that do not compete with other local governments.

Organizational Networks

Among stakeholders for local economic development, private actors in the business community and other governments seeking development may possess valuable information for local governments that can influence the credibility of their positions on subsidies and inform their ability to discern where subsidy controls might put a deal at risk (Feiock & Park, 2005). Following this logic, networks can become useful tools to provide information and to heighten credibility for local governments and businesses in the use of fiscal analyses such as cost–benefit analysis and fiscal impact analysis.

Network relationships are an important but little understood component of local governance and policy decision making (Feiock & Scholz, 2010). Networks within and outside a community facilitate the flow of resources, particularly information, by exchange among organizations (Flora & Flora, 1993; Scott & Davis, 2003). The network relationships in which a city is embedded influence the resources and information available in bargaining with businesses over subsidies. There are at least two mechanisms by which network relationships might influence subsidy decisions: access to strategically valuable information and strengthening of the credibility of commitments and thus bargaining positions.

Networks with other organizations can provide new information about the intentions and likely behavior of both competing governments and the firms with which a local government is negotiating. The political risks of losing potential business to a competing jurisdiction are lessened to the extent that local governments know the intentions and willingness-to-pay of their competitors. Information on business intentions, motivation and likely behavior might also be enhanced through network relationships. This information can allow cities to more strategically decide when they can apply fiscal analyses and when doing so might put the attraction of a particular firm at risk.⁵ We distinguish three types of relevant networks. Networks with other governmental organizations provide information on subsidy control actions of others because these public organizations can share information that can reduce uncertainty and strengthen cities’ bargaining positions. Relationships with the private sector provide sympathetic information and understanding of the business costs and perspectives in development. Third, networks with quasigovernmental/nonprofit development organizations provide information on both other governments and private actors which can inform bargaining decisions and enhance credibility.

Public organizational networks

Public organizational networks refer to interactions among local governments and other governmental organizations focusing on public and collective interests related to economic development (Bozeman & Bretschneider, 1994). Once a firm has decided to locate in a specific region, incentive competition among local governments is zero-sum or negative-sum as firms extract concessions by playing one government against the other and inducing cities to grant concessions that may not be in their long-term economic interest (Feiock, 2002). Although it is well recognized that all cities would fair better by their united refusal to grant subsidies in this situation, it poses a collective action dilemma because a city’s insistence that a subsidy offer be subject to fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis are not credible if competing cities are ready to extend generous offers.

Public organizational networks can play central roles in regulating and organizing development (Garnett, Marlowe, & Pandey, 2008). Network relationships with other governments and public agencies in the region can reduce commitment problems. The exchange of information and building of trust through repeated interactions provides mechanisms for local governments to identify when development policy coordination and analysis of potential development projects may be mutually beneficial. It also facilitates exchange of commitments. The embedded network relationships with other governmental entities then provide mechanisms to monitor and enforce these commitments (Feiock, Lee, Park, & Lee, 2010). Higher level governments may also play a role in mediating competition to attract businesses and reduce transaction costs that arise in development competition. Therefore, local governments that interact and share information with more governmental entities are expected to apply cost–benefit and/or fiscal impact analysis more often.

Hypothesis 3a: Cities with more expansive public organizational networks will apply fiscal analyses to incentives more than cities with less expansive public organizational networks.

Private organizational networks

Economic development policies cannot be entirely publicly run because effective economic development requires private resources, credibility, and expertise (Bartik, 1995). Private sector entities, such as businesses or chambers of commerce are often the locus of local economic growth promotion in a community and advocate for subsidizing private investment. These organizations have substantial experience and expertise in economic development and tapping this knowledge can assist local development efforts and the need for incentives generally and in specific cases. Private organizations are a rich source of information that may not be easily accessible from other sources. Nevertheless, at least some of these actors are likely to be systematically biased in advocating quick actions and presenting subsidies as an economic necessity rather than policy choice (Barnekov & Daniel, 1989). Therefore, local governments that interact and share information with more private entities are expected to apply fiscal analyses less often.

Hypothesis 3b: Cities with more expansive private organizational networks will apply fiscal analyses to incentives less than cities with less expansive private organizational networks.

Public/private organizational networks

We use the term public/private organizational networks to refer to local government relationships with quasigovernmental and nonprofit development organizations. Public/private organizational networks might be especially useful in bridging the information available from governmental and private organizations. Therefore, public/private networks are likely to be formed for socially negotiated solutions or problems (Herranz, 2007). For example, public enterprises have beneficial economic developmental roles to play when there are market failures in delivering high-quality and low-cost services in critical economic areas (Van Wart, Rahm, & Sanders, 2000). Public/private development organizations can monitor businesses’ opportunistic strategies and behaviors or cooperate with businesses to carry out projects with high profitability while simultaneously pursuing public interests rather than governments’. As they often receive financial support from governments, these organizations also have close relationships with governments and support government activities (Koppell, 2003). Therefore, local governmental relationships with public/private organizations can heighten credibility between local governments and businesses through monitoring and provision of a variety of information on businesses. Following this logic, public/private organizational networks can become useful tools for local governments to obtain information and increase credibility. The information on what is important to a firms’ decision calculus and the need for incentives can be validated and balanced with information on intergovernmental relationships to enhance credibility. Therefore, local governments that more extensively interact and share information with more public/private entities are expected to apply fiscal analysis more often.

Hypothesis 3c: Cities with more expansive public/private organizational networks will apply fiscal analyses to incentives more than cities with less expansive public/private organizational networks.

Method

This analysis is based on responses to the 2004 Strategic Economic Development Survey. This national survey to study local economic development policies and activities was conducted in 700 cities of 12 metropolitan areas by Florida State University and Claremont Graduate University. The survey was targeted to elected mayors or appointed managers who have general responsibility for economic development functions in their community. Completed surveys were returned by 274 cities producing a response rate of 39%. Survey measures were combined with archival data from the U.S. Census Bureau and ICMA. The dependent variable and most of the explanatory variables are derived from the survey; however, median household income and form of government is employed from the U.S. Census Bureau and ICMA, respectively. The empirical analysis tests the hypotheses developed in the previous sections to investigate which factors influence the degree to which cities use fiscal analyses such as cost–benefit analysis or fiscal impact analysis when they offer economic development subsidies to businesses.

The dependent variable is measured using an ordinal scale, thus an ordered logit model is estimated.⁶ The measures of subsidy control enforcement are based on one survey question: “How often does your local government perform a cost/benefit or fiscal impact analysis before offering business incentives?” The response categories for each question are never, sometimes, usually, and always. Responses are coded from 1 to 4 to measure the extent to which the control is employed. Even though there are potential limitations in relying on perceptions, this approach seems preferable to dichotomous variables that say nothing about the extent to which a program has been employed and count variables cannot explain the importance and weight of policies or incentives used (Wolman & Spitzley, 1996).

Political institutions

Political institutions are measured by the presence of a mayor-council form of government and the economic development role of the chief appointed professional administrator. Many previous studies incorporated forms of local government and centralization of executive power, based on the argument that strong leaders facilitate greater local economic development activity (Wolman & Spitzley, 1996). Therefore, this study employs forms of government and importance of professional administrators in local economic development policy activity. The mayor form is coded 1 and council-manager form is coded 0. The development role of the administrator is based on a survey measure of whether the administrator played an important role in economic development policy activity, coding 1 = not important to 3 = most important.

Governments’ bargaining position

The various dimensions of bargaining positions discussed above are included in the empirical estimations. The survey first identifies the Importance of Economic Development and Business Subsidy Experience and Expertise. Importance of Economic Development is typically measured by a survey question asking the respondents’ perception of the importance of economic development (Bowman, 1987; Furdell, 1994; Reese, 1993; Rubin, 1988). In this study, Importance of Economic Development measures how cities perceive the importance of economic development dimensions on a 4-point scale ranging from 1 = not at all important to 4 = very important. Business Subsidy Experience and Expertise measures the number of incentive policies for economic development that local governments use based on 13 incentive programs. The number of strategies and incentives used can be employed to measure competitiveness or accumulated experience and expertise (Feiock & Clingermayer, 1992; Fleischmann & Green, 1991). Economic Condition measures citizens’ economic position as measured by logged median household income. Median household income is expected to influence the controls of economic development policies (Feiock & Clingermayer, 1992; Sharp, 1991).

Businesses’ bargaining position

There are multiple dimensions that can be accounted for in measuring economic growth (Wolman & Spitzley, 1996). Our Rate of Economic Growth measure sums the rate of economic development for the last 3 years across seven categories: Residential, Commercial/retail, Office/business services, Wholesale, Manufacturing/industrial, Mixed use in commercial and office, and Mixed use with residential component. Within each category, the range from 1 to 5 was obtained from the survey. Existing Businesses Focus is a dummy variable indicating whether local governments focus on retaining existing businesses because economic development policies and activity usually can be categorized into business attraction and businesses retention. Previous studies report job creation and business retention take precedence over business attraction in economic development strategies (Koven & Lyons, 2003). Regional competition leads to higher local economic development activity (Wolman & Spitzley, 1996), and it will result in greater development incentives and controls. Therefore, the Governmental Alternatives category measures the extent to which cities are perceived as competing with nearby communities for new development. The severity of competition is coded from 1 = not at all to 5 = very severe.

Organizational networks

Recent network management literature emphasizes sector-based differences within a network that provide strategic opportunities and constraints for decision makers coordinating public/private networks resulting in differential network performance (Herranz, 2007, 2010). From this perspective, three types of organizational networks are measured: Public Organizational Networks, Private Organizational Networks, and Public/Private Organizational Networks. For each category, we identify connections with four organizations that network with local governments on development issues. Each organizational network measure is an additive index based on the frequency of interaction coded as 0 = no contact to 4 = weekly. Public network partners include council of government, county government officials/agencies, state government officials/agencies, and officials or agencies in other cities. Private network partners include the chamber of commerce, private consultants, private lending institutions, and real estate or property developers. Public/private network partners include local public–private development organizations, county/regional public–private development organizations, and nonprofit and religious organizations active in economic development. The variables employed for analysis are summarized in the appendix.

Results

We first examine patterns in the use of fiscal analysis of development subsidies and then examine the extent to which our model predicts these patterns. Table 1 reports the frequency with which cities apply cost–benefit analysis or fiscal impact analysis to economic development subsidies. More than 90% of the communities in our sample apply fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis to subsidy offers, although few use it in every instance. Only 9.85% respond that they never apply fiscal analyses. About 23.36% responded they apply fiscal analyses sometimes, and 18.61% usually apply the analyses. Less than half, 48.18%, claim they always apply fiscal analyses to evaluate economic development subsidy requests.

Table 1.

Frequency of Application of Fiscal Analyses to Subsidy Offers

Fiscal analyses application	Frequency	Percentage
Never	27	9.85
Sometimes	64	23.36
Usually	51	18.61
Always	132	48.18
Total	274	100.00

The ordered logit model is estimated in Table 2.⁷ The model exhibits a good fit with the data based on the LR chi² and count R². We find some evidence that political institutions, governmental bargaining power, and organizational networks can influence how development subsidies are managed. The findings in Table 2 impressively support the hypothesized positive effects of professional management institutions on the application of fiscal analyses to development subsidy decisions. As predicted, mayor-council governments apply fiscal analyses less often, and local governments with an appointed administrator position apply fiscal analyses more often. This evidence is consistent with the proposition that political risk aversion of elected officials reduces the use of fiscal analyses in development subsidy decisions and makes local government more vulnerable to exploitation by well-organized business interests.

Table 2.

Ordered Logit Estimation of Use of Fiscal Analyses

Fiscal analyses application	Coefficient (SE)	Odds ratio (SE)
Political institutions
Mayor-council government	−0.49* (0.26)	0.62 (0.16)
Professional administrator position	0.33* (0.20)	1.39 (0.28)
Municipal bargaining power
Governments’ bargaining position
Importance of economic development	0.42** (0.17)	1.52 (0.26)
Business subsidy experience and expertise	0.12** (0.05)	1.13 (0.06)
Economic conditions	0.86* (0.46)	2.37 (1.08)
Businesses’ bargaining position
The rate of economic growth	0.01 (0.03)	1.01 (0.03)
Existing businesses focus	−0.43 (0.31)	0.65 (0.20)
Governmental alternatives	−0.10 (0.09)	0.91 (0.08)
Organizational networks
Public organizational networks	−0.08 (0.05)	0.93 (0.04)
Private organizational networks	−0.02 (0.04)	0.98 (0.04)
Public/private organizational networks	0.10** (0.05)	1.11 (0.05)
Cut 1	9.01 (5.26)
Cut 2	10.62 (5.27)
Cut 3	11.46 (5.27)
Number of observations	274
LR χ²(13)	29.83
Prob > χ²	0.0017
Count R²	.456

Note: Unstandardized coefficients with standard errors in parentheses.

p < .1. **p < .05. ***p < .01.

Indicators of government’s bargaining position, specifically indicators of local experience and expertise with economic development incentives, are positively related to the application of fiscal analyses. Local governments with higher income and which place higher priority on governmental economic-development activities also use fiscal analyses more. However, short-term economic growth did not have a significant effect. We did not find support for our hypotheses that perceptions of development competition or a focus on existing business influence the extent to which fiscal analyses were applied to subsidy offers.

Perhaps the most interesting results are those relating to organizational networks. Neither relationships with governmental actors nor private actors made a significant difference for subsidy decisions. However, the frequency of interactions with private/public organizations such as nonprofit and quasigovernmental entities in organizational networks has a powerful and statistically significant impact on the application of fiscal analyses. This suggests that when local governments are embedded in relationships with these public–private actors, they possess the information and capacity to make commitments to more effectively constrain development subsidies.

Discussion

The results reported here demonstrate that political institutions, governments’ bargaining positions, and private/public organizational network relationships are each important to decision making regarding the application of fiscal analyses to development decisions. Specifically, the significant influence of nonprofit and quasigovernmental organizational networks that focus on obtaining information and increasing credibility together is an important new contribution to our understanding of economic-development decisions.

The results verify that political institutions of local governments significantly influence the bargaining position of politicians and professional administrators in enforcing fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis of development incentives. The use of fiscal analyses tools inherently tends to involve intangible and incalculable factors in evaluating and analyzing cost and benefit including the fiscal impact. Therefore, their evaluations and analyses are likely to be political and subjective decisions. Due to these characteristics, politicians and chief administrators might thus easily intervene in the application of fiscal analyses. Thus, the use of fiscal analyses to constrain the proliferation of development subsidies is inclined to be an outcome of a political bargaining process.

Mayors of local governments are elected officials who have relatively short time horizons due to regular elections and need to demonstrate accomplishments with visible projects. Such efforts might allow them to claim credit, even if the economic benefits to the community are questionable. Therefore, cities with a strong mayor-council form of government tend to apply fiscal analyses such as cost–benefit analysis or fiscal impact analysis less uniformly. Stringent fiscal analyses are likely to act as an entry barrier to attracting businesses. Elected officials who have high-power incentives could try to take advantage subsidy controls through political bargaining power to maximize their own interests.

However, professional administrators usually try to develop their careers through efficient and innovative management of the local economy. Better career opportunities can provide them with multiple opportunities to relocate to cities that offer better conditions. Therefore, if professional administrators are in an important position regarding decision making for economic development, they could seek to enforce fiscal analyses such as cost–benefit analysis or fiscal impact analysis more stringently.

Governments’ capacity also increases the extent to which local governments perform fiscal analyses. As businesses inherently have different goals from local governments, they tend to behave opportunistically. However, local economic development professionals were not as optimistic (Rubin, 1988; Wolman & Spitzley, 1996). Local governments that recognize the importance of economic development will attempt to reduce risk and uncertainty of subsidies and maximize their effects by systematically subjecting all subsidy requests to critical analyses.

In addition, local governments accumulate experience and expertise from fiscal analyses of a variety of incentive policies. They can obtain more information and know-how from experience. This experience and expertise will improve local governments’ bargaining position and will be used as practical techniques in bargaining with businesses. Accordingly, this could make it easier for local governments to apply fiscal analyses such as cost–benefit analysis and/or fiscal impact analysis to incentives for economic development.

Cities’ bargaining position relative to business may depend more on their long-term economic prospects than short-term economic fluctuations or downturns in the city’s economy. We find that local governments with high median household income are likely to have a relatively superior bargaining position compared with business.

Last, the finding that public/private organizational networks promote fiscal analyses of subsidy offers has important ramifications. Although networks can contribute to reducing information costs in the interactions between organizations and to more easily mediating the interests between them, public/private organizational networks can serve as a means of obtaining information and heightening credibility to promote more discriminating development choices.

Conclusion

There are several implications to be drawn from the results. The integration of political bargaining and network approaches appears to provide a useful framework for local development decision making. Previous studies focus on the influence of financial, administrative, and physical resources. However, this study suggests that incorporation of political bargaining and networks can address the limitations of extant research and demonstrates that public/private organizational networks can influence the use of subsidy controls.

Fiscal analysis depends on government’s bargaining position rather than businesses’ bargaining position. Whereas local governments’ bargaining power significantly influences the frequency with which fiscal analysis is employed, businesses’ bargaining position does not have significant impact. It may be that governments have the authority to evaluate businesses that want to obtain subsidies and to choose businesses based on that evaluation. Local governments can have bargaining advantages over businesses under this political circumstance, and factors that local governments can advantageously and easily use will determine bargaining between local governments and businesses. Therefore, although businesses also try to exercise their bargaining power, they seem not to significantly change governments’ willingness or policies on the application of fiscal analyses.

This article demonstrates that organizational networks can play a pivotal and underappreciated role in the application of subsidy controls. Specifically, public/private organizational networks that link governmental and market actors can facilitate the application of fiscal analyses to the incentive demands advanced made by firms. Efforts to constrain the use of development subsidies require accurate and expansive information and high credibility on the part of government when dealing with businesses. The unique role of public/private organizational networks can simultaneously increase government information and credibility. This allows local governments to exert greater influence in the economic development process and enhances their ability to manage and control the use of subsidies in promoting economic growth in their communities.

This finding has important implications for both the study and practice of economic development. The investigation of self-organizing networks has often focused on common pool resources and service delivery arenas where positive sum gains are pursued and the primary issue is coordination. Economic development is fundamentally different because it is characterized by competition for business that in combination with intergovernmental fragmentation creates perceptions of zero-sum competition among the participants that produces political and economic risk (Lee, Feiock, & Lee, 2012). This means information and credibility are key resources for governments when they negotiate with business, but it is generally assumed that business holds a privileged position of advantage in these situations (Feiock et al., 2010; Lindblom, 1977). The results presented in the article suggest that network embeddedness is a resource that local governments can take advantage of to level the playing field. Networks reduce these transactions costs of development: Incomplete information about one or more conditions of contractual situations make defining the obligations, rewards, and penalties imposed on participating parties difficult; even with complete information, the negotiation and bargaining process is time-consuming; even if the bargaining process is addressed, problems with an enforcing agreements make agreements unstable. Finally, the limited work investigating economic-development networks includes only governmental actors (Feiock et al., 2010).

Footnotes

Appendix

Descriptive Results

N = 274	M	SD	Min	Max
The degree of fiscal analyses application (1-4)	3.05	1.05	1	4
Political institutions
Mayor-council government (0/1)	0.34	0.47	0	1
Professional administrator position (1-3)	2.26	0.63	1	3
Municipal bargaining power
Governments’ bargaining position
Importance of economic development (1-4)	3.58	0.68	2	4
Business subsidy experience and expertise (0-13)	4.76	2.63	0	13
Economic conditions (ln median household income)	10.69	0.29	9.61	11.66
Businesses’ bargaining position
The rate of economic growth (0-35)	18.47	4.87	7	35
Existing businesses focus (0/1)	0.81	0.39	0	1
Governmental alternatives (1-5)	2.97	1.29	1	5
Organizational networks
Public organizational networks (0-16)	9.40	3.42	0	16
Private organizational networks (0-16)	10.95	3.27	0	16
Public/private organizational networks (0-16)	8.39	3.13	0	15

Note: The numbers in parentheses next to variables indicate scale of each variable.

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

Bios

Hyunsang Ha is a doctoral candidate at the Askew School of Public Administration and Policy of Florida State University. His specialization is policy and performance management, collective action problems and governance, relating specifically to sustainable development, environment, and renewable energy.

Richard C. Feiock is Augustus B. Turnbull Professor at the Askew School of Public Administration and Policy of Florida State University and has written or edited six books and more than a hundred refereed journal articles. His current interests are policies and networks in sustainable economic development and energy.

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