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Which Economic Development Policies Work: Determinants of State Per Capita Income

IJED, Vol. 1 No. 3, (1999)

Economic development policies add to state economic efficiency and welfare if they compensate manufacturing firms for the positive externalities they produce. Incentives which try to alter business behavior, but do not produce positive externalities greater than their costs may, however, distort the market-place and result in reduced state economic efficiency and welfare. This article reports the results of a pooled cross sectional time series analysis that was conducted to estimate the influence of different types of economic development policies on one measure of overall welfare, change in state per capita income, for the years 1979 through 1995. Results suggest state development policies which offer tax breaks to all manufacturing firms, and programs which offer state loans and loan guarantees for all manufacturing firms, are positively related to growth in state per capita income. Programs which attempt to elicit specific firm behavior, such as incentives for new investment and incentives to create jobs, were negatively related to growth in per capita income. "Demand" side entrepreneurial state policies had no significant influence on per capita personal income.

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