Highsmith: Regulating Location Incentives
In Regulating Location Incentives, Brian Highsmith (Harvard Law) develops a historical, economic, and institutional case for using the Federal Trade Commission (FTC) Act to study the market consequences of what he calls inefficient incentive megadeals.
Highsmith is focused on the use of public incentives and financial support to attract relocation or expansion of private business. Highsmith is particularly concerned about efforts by dominant firms to establish unfair market advantages by leveraging their structural power over competing localities to demand targeted financial support and regulatory forbearance.
One example of this practice is Amazon’s 2017 search for a location for a second North American headquarters (Amazon HQ2). According to Highsmith, Amazon invited local and state governments to prepare formal bids with lucrative location incentives. In total, 238 proposals were submitted. These proposals included Chicago, offering $2.3 billion in state and local tax breaks; Maryland’s Montgomery County, offering the most extensive package of $8.5 billion; and New Jersey, offering a $10,000 tax credit per employee. Amazon ultimately accepted the proposal of Arlington, Virginia. However, the promised jobs never materialized, as Amazon HQ2 was paused indefinitely.
Amazon’s megadeal falling through is not unique. Research suggests that the largest firms are most likely to get the largest deals, even though those megadeals may be least likely to economically benefit the jurisdiction. Highsmith compares these location incentives to those offered in the 1860s to private railroad companies. Many of these railroads were never built or, if built, did not bring the economic benefits promised to local governments.
The FTC exists to enforce antimonopoly policies and was created to better regulate the railroad industry by restraining the competitive practice between states attempting to attract the railroad industry. This article argues that the harm associated with contemporary megadeals should be a part of this antimonopoly policy.
As a first step, Highsmith suggests, the FTC could commission a comprehensive study about the relationship between location incentive megadeals and market structure. This would be beneficial as current research is lacking due to nondisclosure agreements – something the FTC could bypass with statutory authority. This information would then allow policymakers and the federal government to pursue actions against specific anticompetitive abuses related to dominant firms’ incentive demands.
