Curt Schilling is a former Red Sox pitcher. In 2010, his video game production business, 38 Studio was enticed to move from Massachusetts to Rhode Island with a $75 million loan guarantee from the state’s Economic Development Corporation (EDC). The bet Rhode Island placed was that 38 Studio (named after Schilling’s Red Sox number) would bring 450 jobs to the Ocean State. On May 1, the company failed to make a $1.1 million payment to the EDC. If the company tanks, Rhode Island taxpayers must pay for the loan. Schilling would like another chance and met with the Governor today to discuss further subsidies for the company’s second game, Copernicus. To his credit, Governor Lincoln Chafee was opposed to the initial loan guarantee which was made by his predecessor.
Rhode Island is of course not the only state with Economic Development Corporations offering taxpayer-subsidized corporate bait to lure companies into their states with the promise of jobs and prosperity. Policymakers simply do not think there’s any harm in it. But as Rhode Island’s bet on Schilling’s company shows – unless the party making the loan (the EDC and former Governor Carcieri) has skin in the game (in the form of their own capital) the potential for moral hazard exists. That is, the risks of a potential loss are downplayed or ignored by government officials because they are being borne by another party – the taxpayer. Moral hazard may also encourage the company getting the subsidized loan to take on undue risk.
Put this subsidy in the context of what taxpayers are already facing in Rhode Island. Pension and health care obligations rising quickly at both the state and municipal levels. Providence, West Warwick and Woonsocket are all perilously close to bankruptcy.
And for more on how targeted subsidies produces distorted decision making read Matt’s work: Why Favor Manufacturing? and listen to his discussion with Kojo Nnamdi on Targeted Business Incentives and Transparency.