Business Incentive Controls and Political Bargaining: Performance Agreements and Clawback Clauses in American Cities

Abstract

This study examines factors that influence the use of performance agreements with clawback clauses as a means of controlling economic development incentives. The author advances a bargaining model based on networks as a lens for understanding development subsidies and controls. While a financially weak local government and local governments that primarily interact with private organizations tend to more loosely implement performance agreements and clawback clauses, local governments in areas with a business sector dominated by large companies and local governments that interact with public organizations tend to more strictly apply them. Another interesting finding is that bargaining conditions based on network relationships play an important role in the decision to always implement performance agreements with clawback clauses and that poor bargaining conditions result in local governments negotiating less binding arrangements. The results verify the utility of a bargaining approach and suggest that local governments can help to encourage more accountable and cost-efficient economic development by carefully managing bargaining conditions and networks.