Preference policies: perpetual costs of distributive politics

Abstract

Many, but not all, US state governments have adopted 'preference policies' that give an advantage to in-state businesses (vendors) who submit bid proposals for state projects. Most preference policies are specified in terms of a specific percentage advantage, which means that an in-state vendor will be chosen even if they submit a higher bid than a lower-cost out-of-state vendor. Some states have broad policies that apply to all or virtually all state contracts, while others apply these policies selectively only to one or a few specific goods and services. We estimate the effects of these policies on the costs of government. We find that preference policies are associated with a $167 increase per person in state construction costs and a $176 increase per capita in capital expenditures. In addition, we find that states implementing preference policies experienced a one unit decline in their economic freedom scores.