The Political Economy of Subsidy Giving

While subsidy-giving can help correct for market failures—allowing a firm to internalize the positive externality it has in a location—there are concerns that is also used by politicians for electoral gain. I estimate the political benefit of subsidy-giving by combining hand-collected subsidy data, county level election returns, and an original survey of voters in states with recent subsidy deals. I find that the incumbent governor’s vote share increases by 2 to 3 percentage points in subsidy-winning counties. Surprisingly, the vote share effect is not correlated with the number of jobs promised at the subsidized establishment. In fact, the effect is only present for deals with news coverage and the effect is largest when the subsidy is announced during the election year: the governor accrues political benefit before any jobs are created. I provide suggestive evidence that career concerned governors prefer subsidy-giving to other job creation policies because of the positive media coverage of these subsidy deals