Study Shows the Nexus Between Corporate Subsidies and Corporate Malfeasance

Corruption begets lawbreaking.

Photo credit: Brandon Anderson

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Regular readers here know there is a clear connection between corporate subsidies — specific corporations receiving public money for specific actions, such as opening a warehouse or a factory somewhere — and corruption in the political system.

For example, subsidized corporations plow more money into donations to incumbent politicians in order to continue their extraction, enabling them to receive more and larger subsidy awards. Corporations with more lobbyists receive more subsidy dollars (all else being equal). And politicians in states that favor doling out subsidies are more likely to cross the line into actual criminal behavior than those who don’t.

A new study adds one more negative aspect to this too-cozy relationship between dominant corporations and state-level policymakers: Corporations that receive state-level economic development subsidies are more likely to engage in “misconduct” — i.e., violate labor, environmental, or consumer protection law — because their leaders evidently believe that the same politicians who subsidized them will overlook their wrongdoing in the name of building political capital.

The study, by Aneesh Raghunandan, an assistant professor of accounting at Yale, compared state and federal enforcement actions against corporate actors, and found that corporations receiving state subsidies were more likely to engage in misconduct, but that state regulators and lawmakers were less likely to attempt to hold them to account:

I find that firms receiving targeted subsidies from state governments are more likely to subsequently be penalized by the federal government for corporate misconduct committed in subsidizing states (but not in other states in which the firm operates). The plausible exogeneity of federal enforcement to state-level connections implies that this finding represents an increased underlying level of corporate misconduct committed by these companies rather than any shifts in enforcement. Moreover, the increased level of misconduct occurs while the subsidy-awarding state administration is still in power, consistent with firms perceiving there to be more lenient enforcement by the authorities that granted the subsidy in the first place.

So the argument is that, because state politicians are banking on subsidized corporations creating economic activity for which they can take credit and hopefully win votes in a future election, they are loath to prosecute misconduct at subsidized firms. And those subsidized firms know it, so they go wild.

As Raghunandan said, politicians love to say “‘Look how many jobs were created on my watch, look at all the things I did while in office to lure companies to the state.’ They may not be incentivized to crack down on corner-cutting.”

Indeed, an interesting piece of evidence bolstering his theory is that, when a state attorney general and governor are from different parties — meaning the AG has an incentive to clip the governor’s wings so that she can perhaps become governor herself someday — the increase in corporate misconduct doesn’t materialize.

Raghunandan also noted that the misconduct increase is isolated to the state in which a particular corporation receives subsidies, meaning the data isn’t reflecting a wider corporate crime spree that just happened to coincide with some state-level subsidy awards.

So this is a very real, negative externality of the corporate subsidy machine, in addition to the budgetary impacts communicates face when their leaders blow public money on ineffective economic development efforts: Workers, the environment, and the personal finances of community members take a hit too.

Now, there was not a commensurate drop in federal regulatory enforcement, pushing back a bit against the theory, as firms should have anticipated that the federal government would not have the same incentive to turn a blind eye to misconduct as their state counterparts. However, as Raghunandan notes, federal penalties for the sort of violations he looked at are very low, so may just be worth it to corporate leaders if increased profits exceed the amount they pay in federal penalties.

But the study is absolutely a concerning piece of data that should make state lawmakers even more wary of depending on corporate subsidies to achieve their economic development goals: They may be using state dollars to subsidize an increase in corporate crime.

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SHAMELESS SELF-PROMOTION: I talked to the American Prospect about the future of the Democratic Party and why state-level Democrats need to wield their power effectively to implement popular measures. Read it here.

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SIMPLY STATED: Here are links to a few stories that caught my eye this week.

• Ohio Attorney General Dave Yost said the state likely can’t claw back $600 million provided to an Intel plant that will miss key hiring deadlines.

• A policy brief from the Groundwork Collaborative argues that owners of publicly-funded sports stadiums should have to implement so-called “street pricing” for concessions.

• A Florida bill, written by a hedge fund lobbyist, would allow corporations to subject workers to longer non-compete agreements.

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— Pat Garofalo