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The Consequences of State Economic Development Strategies on Income Distribution in the American States, 1976 to 1994

University of Arizona

I ask whether the economic development strategies pursued by state governments to stimulate growth have unintended consequences for the well-being of the citizenry, particularly income distribution. Pooled cross-sectional time-series analysis was employed to empirically evaluate the effects of state economic development strategy on the distribution of income in the American states for the 1976 to 1994 period. Results demonstrate that the economic development strategy state governments take has differential effects on the distribution of income. States that adopt demand-side policies (promoting research and development, technology, and exportation) more than traditional supply-side policies (offering tax abatements and capital subsidies) are associated with more equitable distributions of income. Although the results indicate that states have the power to reduce income inequalities by employing more demand-oriented economic development strategies, the substantive impact is quite small, and the frequency with which states do this is rare when compared to the use of supply-side tactics.

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