Speaking Falsehoods to Power: States' Misguided Use of 'Cost-of-Doing-Business' Studies in Economic Development Policy

Economic developers at the local and state levels have increasingly used cost-of-doing-business studies to compare their jurisdictions against others. The cost of doing business is enormously difficult to demonstrate in practice because: (1) there are many different types of business costs, many of which are difficult to measure; (2) in making their location choices, businesses take into account more than direct cost differences; and (3) businesses often behave in a dynamic way and either change how they operate to accommodate cost increases or accept some high costs if there are compensating lower costs or benefit payoffs in a particular location. This paper shows that the data and methods used in typical cost-of-doing-business studies are flawed and incomplete and therefore the implications of the studies are misleading.