One of my favorite examples of a prisoner's dilemma is when states compete to lure companies to relocate, each state offering greater and greater development packages and tax breaks. Offering such tax breaks is a dominant strategy—if other states don't offer tax breaks, you will certainly win if you do; if other states offer tax breaks, the only way to stay in the running is to offer them as well.
Earlier this year, Wisconsin offered $3 billion to lure a Foxconn factory to its state. New Jersey is offering up to $7 billion to lure Amazon to open a new headquarters.
The problem is that such offers lead to an arms race in which the tax breaks actually become irrelevant. When every state offers huge tax incentives, companies decide on non-tax factors like an area's labor force, transportation, and quality of life. But that's exactly how companies would decide in the absence of state tax incentives. Thus, the incentives don't change what companies ultimately do, but they sure cost a lot.
As John Oliver observes, that's why some of the states that aggressively offer tax breaks, like Connecticut, see only a return of seven cents on every dollar given away.
How would states get out of this prisoner's dilemma? Would the only option to get past their distrust of each other's commitment (or lack thereof) be involving the federal government?ReplyDelete
I feel like states would rather continue to throw away money than do that.
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So happy to see a John Oliver quote on the blog! Love him! Western New York, where I live, is also in the process of luring Amazon here. The big question is, will we be better off? Will the tax breaks that we give be enough to counter what we’ve given up? A return of 7 cents on the dollar does not seem worth it to me.ReplyDelete
“The point of studying the prisoners’ dilemma is to learn to avoid these outcomes and work on developing long-run strategies that change the structure of the game to make your own payoffs less dependent on our rivals’ actions”. (Froeb, McCann, Shor, Ward, 2016) If it truly doesn’t matter what WNY offers for free to Amazon, why aren’t we concentrating on what we have to offer that no other city does? We have Niagara Falls power, border Canada, very reasonable housing, great schools, cheap technology and utilities and awesome people.
“The art of business consists of identifying assets in low-valued uses and devising ways to profitably move them to higher-valued ones”. (Froeb et al, 2016) The assets in WNY that are low-valued would be the property that currently exists in our lower economic geographic area. A true gold mine for the taking.
“In Seattle, rents have increased with the demand, reaching an average in downtown Seattle of $42.08 per square foot, compared with $39.79 in 2015 and $31.38 in 2009. "It's not just population growth, but higher-paying jobs that are driving that growth," Olsen said. "Rent is growing the fastest in the Seattle metropolitan area compared to any other metro area in the US — 7.2% growth year over year is very strong. Anything over 3% raises your eyebrows."
“As Amazon and other tech companies have accelerated hiring in Seattle, residential real-estate developers have also upped their pace. A record number of new apartments have come online in the last year to accommodate the growing population. While some of those have been luxury apartments in high-rise buildings, there has also been an increasing number of moderately sized homes and garden-style apartments”. At the same time, home values have gone up, increasing 11.2% in the last year, according to Zillow. That's compared with a 6.9% increase nationally. (Stone, 2017) Could this happen for WNY? This would profitably move to higher home/business real estate values in WNY.
On a personal note, having visited Seattle a number of times for business, not a huge fan. I wasn’t prepared for the endless traffic lines, late flights out and long coffee lines, but can understand why our small business can’t retain employees. Good employees are gobbled up by the big players – small business can’t compete. The lure of the higher pay plus perquisites is too much for our budget to hold on to some talented employees. Incentive pay becomes a viable option for our high performers. Available for all employees, but strictly tied to performance, this becomes our only option. This works well in our manufacturing area where “incentive schemes are most effective when effort matters, there is little intrinsic desire to do the job and money boosts the recipient’s social status”. (Froeb et al, 2016) I have come to the conclusion that “yeah, we’re good”!
Froeb, L., McCann, B., Shor, M., Ward, M., 2016. Managerial Economics A Problem Solving Approach, Boston, MA. Cengage
Stone, M., 2017, Amazon is taking over Seattle — and residents are calling it 'Armageddon', Business Insider, Downloaded 11/29/2017 from: http://www.businessinsider.com/amazon-is-taking-over-seattle-2017-4
Being a lifelong resident of Rochester and Syracuse New York, I have seen the effects of globalization and a higher tax base contributing to thousands of lost manufacturing jobs. I work for Carrier Transicold in Syracuse and we moved our warehouse distribution to Tennessee, due in part because of the tax breaks offered by Tennessee.ReplyDelete
Syracuse and Rochester have both entered the Amazon next headquarter competition. Both of their local governments, along with New York State are offering tax breaks along with the majority of competing cities and states are. In the strategic game of prisoners dilemma, offering such tax breaks is a dominant strategy, and those that do not will likely not stay in the game. However, what will likely persuade Amazon to pick it’s winner is the one that differentiates itself (other than the dominant strategy of tax breaks) from the others. As Froeb (2016) contends, “The implication of the prisoners’ dilemma for long-run strategy is clear; try to avoid games with the logical structure of a prisoners’ dilemma. Instead, work on developing long-run strategies that change the structure of the game to make your own payoffs less dependent on your rivals action. If possible, try to differentiate your product or figure out a way to lower your costs”. (P. 194)
For Rochester and Syracuse to have a chance, they should focus on their strengths and competitive advantages that Amazon would be looking for in their next HQ location. Some of these competitive advantages are a highly skilled labor force, many top level universities, low cost of living, great schools for children and a safe place to live. Buffalo and Rochester proposed a combined bid and emphasized their differentiation and competitive advantages beyond the tax breaks. As Schlosser (2017) contends, ““In assessing the full scope of the Amazon HQ2 RFP opportunity, it was apparent that by linking our efforts, the combined Buffalo Rochester Metro Corridor can offer a proposal that is both compelling and extremely competitive,” said Tom Kucharski, president of Invest Buffalo Niagara, and Matt Hurlbutt, interim president and CEO of Greater Rochester Enterprise, in a joint news release on Thursday. “With over 2.2 million people, a very talented labor pool, and an extremely livable community, our organizations are excited to join forces in attempting to draw the interest of Amazon.”
Froeb, L., McCann, B., Shor, M., & Ward, M. (2016). Managerial Economics. Boston, MA: Cengage Learning.
Schlosser, K. (2017, October 12). Snow way! Buffalo and Rochester, N.Y. , will make bid for Amazon HQ2 as one metro corridor. Retrieved from GeekWire: https://www.geekwire.com/2017/snow-way-buffalo-rochester-n-y-will-make-bid-amazon-hq2-one-metro-corridor/
John Oliver has one of my favorite shows in Last Week Tonight. He is able to take complex issues and explain them in a way that is both entertaining and informational. Since I live in NY, and I have worked in both community building and nonprofits, I have seen the impact of programs like Startup NY. One part of it that Mr. Oliver does not reference is that this program works if you are close to or cooperate with a SUNY Campus. It is interesting to see what types of businesses take advantage of this program. I recently left a job for Morrisville State College and the two Startup NY companies that we worked with were Empire Brewing Company and Good Nature Brewing Company. At the time that the program started, Morrisville did not have any students in anything even relating to brewing or beer. This fall, Morrisville did open a new program in brewing and opened a Brewing Institute. Before that, the two breweries were receiving tax breaks just because they in some way had contact with a SUNY Campus.ReplyDelete
States are constantly working with deficits and one of the reasons that they run deficits is because of all of these tax breaks. The reason that states, as Mr. Oliver so expertly explained, have to give these tax breaks is because every other state is giving a tax break which is the heart of the prisoner’s dilemma (Froeb, McCann, Shor & Ward, 2016, Pg. 194). If no states gave tax breaks then companies would still open businesses but since one state gives tax breaks, the rest must if they want to attract these companies. This is a repeated prisoners dilemma which is extremely evident in the case of Amazon and the fact that they are openly courting many different states to ask for incentives to open their second major location. Even upstate NY has put together a public relations and tax break scheme to try and lure in Amazon. The only way to get out of a repeated prisoners dilemma is to either respond immediately to others when they act or to be nice (Froeb, McCann, Shor & Ward, 2016, Pg. 195). This means that there will be this continuous cycle of increased tax breaks which will won’t end until there is no more taxes to cut or states need to start working together and eliminating these tax breaks entirely.
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics a problem-solving approach. Boston, MA: Cengage Learning.
When Buffalo was in the running to be the potential site of Solar City in South Buffalo, tax breaks were a major talking point for all politicians and community leaders looking to lure the operation to our area.ReplyDelete
Charles Schumer highlighted the potential tax break incentives. The program, which was due to sunset now runs through 2021, provides a 30 percent tax credit on all solar panel purchases made by commercial or residential projects through 2019 with a phase down to 26 percent in 2020 and 21 percent in 2021 and 10 percent for commercial projects after 2021.
“Without the tax breaks, the solar industry would have seen minimal, if any, growth. Tax breaks would have dropped to just 10 percent, beginning in 2016.” (Fink, 2015)
These tax breaks were spun by those advocating for them as a message to the world that “the U.S. takes climate control seriously.
On the other side lies the prisoners’ dilemma facing cities across the U.S. that are clamoring for Amazon or the promise of other headquarters leading to revenue and jobs. In the prisoners’ dilemma, conflict and cooperation are in tension. Managerial Economics states self-interest leads to outcomes that reduce both players’ payoffs. It is unrealistic to think that the companies competing for Amazon will cooperate to level the playing field, creating the prisoners’ dilemma. Billions of dollars, tax breaks and “goodies” are being proposed across the country, in theory, cancelling each other out. The bids are becoming so extravagant that the cities not taking into account the potential losses that will happen in their communities.
One FastCompany article highlighted the potential drain on the community’s public expense if chosen. “More families arriving means more teachers to hire; more classrooms, roads, water mains and sewerage to build; more public safety to provide; and more trash to pick up. All of those things cost money. But if Amazon is paying no sales tax, no property tax, no income tax, and is getting cash gifts from its employees and/or the state treasury by selling tax credits, then Amazon won’t be bearing those new costs.”(Leroy, 2017)
Taxes will go up, quality of public services will decrease or both. Gentrification, as it happened in Seattle is also a cost of this “free growth” brought by Amazon.
Fink, James. Bizjournals.com, 2015, www.bizjournals.com/buffalo/news/2015/12/22/tax-break-extensions-to-aid-solarcitys-growth.html.
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics a problem solving approach. Boston, MA: Cengage Learning.
The competition for the Amazon Headquarters in various cities is likened to the strategies in game theory and the prisoner’s dilemma. In order for cities to be competitive they offer tax breaks such as New Jersey did, offering up to $7 billion while Illinois offered $2.25 billion in incentives and tax breaks.. “Amazon says it received 238 proposals from 54 states, provinces, districts and territories in North America by the Oct. 19 deadline” (Cohn, 2017).ReplyDelete
Little wonder that the states and cities want Amazon headquarters with the potential for Amazon’s $5 billion spend on the headquarters that will employ 50,000 people. (Amazon, 2017). Amazon is looking for metro areas with at least 1 million people and a stable business friendly environment that includes a strong workforce for technology and creative thinking (Cohn, 2017). The CNBC Analysis gives the best chances to Atlanta, Raleigh, Charlotte and Greensboro-High Point, North Carolina. Other strong contenders are within the Washington, D.C., area, including Northern Virginia; and Austin, Texas. All have strong workforces, reasonably good economies and business-friendly regulations. (Cohn, 2017). Not only does the business environment benefit but the community as well. In Seattle Amazon has a strong commitment to social responsibility having contributed to charitable causes such as Mary’s Place where they support a shelter for homeless families in their building (Amazon, 2017).
Using the grading system completed by CNBC I reduced the system to the highest scoring cities. Amazon could accept or reject any or all. CNBC graded bids for Amazon's HQ2 project based on the company's four main criteria: A metropolitan area with more than 1 million people; a stable, business friendly environment, ability to attract and retain strong talent, and creative thinking when considering locations. I deleted the rows with an average letter grade of C or lower leaving the remaining cities as CNBC’s most likely picks which they used . The cities with an average score of B- are Austin TX, Atlanta, GA, Seattle, WA, Salt Lake City, UT, Nashville TN and DC/VA. The only area with an average score of B was Ral/CLT/GSO, NC. The source for this CNBC information was America’s Top State for Business 2017, U.S. Census Bureau.
With the promise of tax breaks by the places vying for Amazon’s headquarters begins to apply the Nash equilibrium concept to the proposals (Froeb, McCann, Shor & Ward, 2016, p.186.) while Amazon figures out their advantage in the strategic game of where to locate. This equilibrium will ultimately make the factors of the labor market, transportation opportunities, and quality of life issues the deciding factors for Amazon. Amazon will use strategic bargaining to use alternatives to their advantage. Amazon has the first move in the game in trying to steer their opponents, the selected location, to their perfect equilibrium.In the end I think that the result will be a win-win for Amazon and the selected location.
Amazon. (2017). Amazon HQ2. Retrieved on December 1, 2017 from https://www.amazon.com/b?node=17044620011.
Archer, S. (2017, November 17). A new study predicts the top 13 places where Amazon could build its new headquarters. Retrieved on December 1, 2017 from http://www.businessinsider.com/amazon-new-headquarters-sterlings-study-predicts-top-13-places-for-hq2-2017-11/#no-13-san-jose-california-1.
Cohn, S. (2017, November 20). These cities have the best chance of winning the war for Amazon’s new headquarters. CNBC. Retrieved on December 1, 2017 from https://www.cnbc.com/2017/11/20/these-cities-may-win-war-for-amazons-new-headquarters.html.
Froeb, L. M., McCann, B. T., Shor, M. & Ward, M. R. (2016). Managerial economics: A problem solving approach. Boston, MA: Cengage Learning.
You can always rely on Comedy Central to tell the truth! (although I miss the Colbert report) This post caught my eye because it never occurred to me that State politics could fall into the same trappings as a business. The tax incentives exhibit the same logical structure as the prisoners’ dilemma. The Nash equilibrium of a prisoners’ dilemma represents an unconsummated wealth-creating transaction between two players. Rival States both use tax incentives as a predatory method to steal market share from rivals. Both States could benefit more by not giving tax breaks, but then they would not be in equilibrium. If the rival doesn’t give incentives, each State can do better by giving incentives and stealing the other States interests. The only Nash equilibrium is for both to give incentives and earn lower returns.ReplyDelete
The solution to learn to avoid these negative outcomes and or learn how to consummate these unconsummated wealth-creating transactions among the States. The States need to change the payoff structure of the game in the long run by making payoffs less dependent on the rival’s actions, and if possible try to differentiate their State from others so that it is more attractive. Instead of tax incentives, New York uses their electric grid and power supplies as incentives. We also promote our educated populace and extensive transportation matrix as advantages to business.
This anecdote by John Oliver, was great on how he simplified and explained government waste because there is no accountability. Even though this is a great example of the prisoner’s dilemma it also shows a great example of a Moral Hazard because the government employees, or governors, exercise less care to offer any incentives possible to companies because they do not have an incentive to make incentives cost effective.ReplyDelete
From what I have seen from government agency, they seem more worried about how they will be perceived by community instead of monitoring wasted expenses. The reason, I believe this is, is because elected officials want to win community support over to become elected again. So even if an elected official could reduce cost by laying people off or reducing services it would hurt them in winning support in future elections.
This idea then reflects another strategy game known as the dating game. In this case the two groups, or individual, represented is the elected official and the voters. From this we can analyze the tensions between the two groups. So the voters will lobby for more jobs and higher wages and the elected official wants to be more fiscally responsible. Although, the elected official might choose to keep his job so he might choose to be less fiscally responsible. On the other hand if the elected official is fiscally responsible he might lose votes in the next election. So from this strategy game the elected official and voters will have to eventually realize which will give them both a higher group payoff, which could mean raise taxes but everyone keeps their jobs.
Over $80 billion annually is forfeited by communities in incentives and tax breaks to lure businesses to communities or keep them from moving away. It has become expected for companies to receive them and all they have to do is threaten leaving a community, and incentives and tax breaks are offered. The best threat is one that never has to be used, and companies exploit that fear of leaving a community to receive tax breaks or additional subsidies.ReplyDelete
Tax breaks and incentives have become so prevalent that companies expect them and a community has to offer them to stay competitive. It’s the classic prisoner’s dilemma, if nobody offered them, everyone would be better off, but in a community’s best interest to offer them if others don’t.
Economists have resoundingly concluded that all the subsidies and tax breaks is a zero-sum game. Jobs created in one community are lost in another as companies are lured to a new community. And to date, there is little evidence that the incentives actually stimulate or create job growth. There is little to no accountability for public officials who offer the incentives at the public’s expense and the community receives little or nothing in return. States are giving up billions annually in subsidies and tax breaks that could be spent on schools and infrastructure. Research on subsidies and tax incentives has shown that as many as 9 out of 10 business decisions would have happened without the incentives given.
Ultimately, it’s the individual taxpayers in each community that have to make up the shortfalls created.
This post and John Oliver’s video on tax development definitely does a great job illustrating a real-life example of a prisoner’s dilemma. The Managerial Economics text explains to us that a prisoner’s dilemma occurs when “conflict and cooperation are in tension” (Froeb, McCann, Shor, & Ward, 2016, p. 200). For these cities bidding for Amazon’s headquarters, there is the possibility that they actually could benefit more from the situation if they did not offer extensive tax breaks in competition against each other, because it is possible and likely Amazon will pick a location based on the other factors you’ve mentioned, Mike, including labor force, transportation, and quality of life.ReplyDelete
In fact, Oliver and economists alike have gone on to explain that these incentives can actually be harmful to the community as a whole. Dr. Bartik, from W.E. Upjohn Institute for Employment Research explained to the Wall Street Journal that incentives spent (or cut) to bring in large companies like Amazon would normally be used to fund other purposes of economics development, such as education (Raice, 2017). In offering these companies the incentives as funds, or breaks and thus creating a lack of revenue for the area, cities and states are actually potentially doing more long term harm for themselves. This is another component of a prisoners dilemma, that parties are actually willing to act out of self-interest that does more harm than necessary.
What I’m wondering is if there will ever be a slow down of these incentive programs. Again, the Wall Street Journal report that tax breaks consisted of 8.8% of state revenue in 1990 and rose to 30.1% in 2015 (Raice, 2017). However, as seen in Oliver’s video, many businesses will make decisions to commit to locations regardless of the presence of an incentive. If we look at this situation as a sequential-move game, and really a game of chicken, we know that it is possible that if a few states committed to stop offering incentives, more states might follow suit. But I really doubt any state would make such a commitment. Creating a credible commitment, and potentially acting against self-interest (Froeb, McCann, Shor, & Ward, 2016, p. 200), would take a lot of work and a potential for a lot of loss and risk in the current business environment.
Froeb, L. M., McCann, B. T., Shor, M. & Ward, M. R. (2016). Managerial economics: A problem solving approach. Boston, MA: Cengage Learning.
Raice, Shayndi. (2017). As Cities Look to Lure Amazon, Tax Breaks May Be Key. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/as-cities-look-to-lure-amazon-tax-breaks-may-be-key-1504814719.
This is a great example of prisoner’s dilemma in a real life situation. Another example related to world government superpowers that is relevant today is the nuclear arms race/military expenditures of certain countries around the world. This scenario involves the problem of two states engaged in an arms race. Both governments will reason that they have two options, either to increase military expenditure or to make an agreement to reduce weapons. Either state will benefit from military expansion regardless of what the other state does; therefore, they both incline towards military expansion. The paradox is that both states are acting rationally, but producing an apparently irrational result. This could be considered a corollary to deterrence theory. In prisoner’s dilemma, conflict and cooperation are in tension-self-interest leads the players to outcomes that no one likes. Studying the games can help you find a way to avoid these bad outcomes (Froeb, McCann, Shor, Ward, 2016). Another law/governmental real life example of this economic concept in action is the theoretical conclusion of prisoners dilemma as it relates to plea bargaining in the court of law being forbidden in most countries. As the prisons dilemma scenario applies; it is in the interest of both suspects to confess and testify against the other prisoner/suspect, even if each is innocent of the alleged crime. Potentially, the worst case is when only one party is guilty here, the innocent one is unlikely to confess, while the guilty one is likely to confess and testify against the innocent.ReplyDelete
Froeb, L. M., McCann, B. T., Shor, M., Ward, M. R. Managerial Economics a Problem Solving
It’s interesting to see the different perspectives on prisoner’s dilemma, including John Oliver’s mention on state incentives that draw these different companies to a relocation or expansion in selective states. While this topic is a hot one especially with the Amazon HQ2 in motion planning to head towards the northeast region where the different enticement and tax breaks roll in. It appears after some research and enlightenment not all tax breaks and incentives bring about the economy boost intended.ReplyDelete
Which bring us to the more recent action item the Corporate Tax Reform. A prisoner’s dilemma perhaps? Allowing companies an opportunity to build their investment to create jobs and help the economy sounds like the right solution. Randall Stephenson Chairman & CEO of AT&T announced that Congress approved the legislation representing the first comprehensive tax reform in a generation that Trump is expected to sign the bill any day now.
This 21% corporate tax rate for U.S businesses encourages ATT and other businesses to invest more in the US. More investment means more good paying jobs and ultimately increases economic growth, something our struggling economy needs. Corporate tax rates is the optimal solution to the problems caused by international tax competition. Currently AT&T pays over 35% percent in corporate tax. Wow! The flip side, what does the corporate tax reduction do to our national deficit?
With the savings ATT has committed to investing over 1 billion dollars in the US for 2018 which is not only relieving for me as a Manager as I am constantly facing uncertainty with the business direction and the wireless industry itself. But in addition to this tax incentive ATT is set to pay out 1,000 bonus to each employee over 200,000 in total –How timely! (Fung Brian)
Fung B. (2017, December 20) Washington Post: Breaking News, World US, DC News & Analysis. Retrieved December 20, 2017, from https://www.washingtonpost.com/
PLEASE READ PLEASE READReplyDelete
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