Regular readers of this blog (or students I have taught in ECONS102) will know that I'm not a fan of subsidising particular industries, especially when it is the industries themselves that are crying out for the subsidies. Cue Calvin and Hobbes:
So, last month's news about the gaming development incentives in Australia was a little disturbing to me. As NBR reported (paywalled):
The Australian government’s recently announced 30% tax offset for game developers could lead to a brain drain if not matched by New Zealand, an industry body has warned.
Australia’s next federal budget will include a 30% refundable tax offset for video game development as part of the government’s National Digital Economy Package.
Australia’s Interactive Games and Entertainment Association said the break would spur the creation of new Australian game development studios, accelerate the growth of existing Australian studios, and attract blockbuster game studios to Australia, creating jobs along the way.
On this side of the Tasman, New Zealand Game Developers Association chair Chelsea Rapp said the Australian tax offset would give Australian studios a massive leg-up over their New Zealand peers.
New Zealand has an existing incentive programme for film, which has successfully attracted major projects to the country, but video games are specifically excluded from the scheme.
Rapp said the NZGDA had been campaigning for this sort of government support for nearly 10 years.
There are several interrelated issues here. First, as I note in my ECONS102 class, lobbying the government to get your firm (or your industry) a better deal is essentially a socially wasteful activity. Economists refer to it as 'rent seeking' - in this case, the New Zealand gaming development industry is seeking to gain some economic rent from the taxpayer in the form of the subsidy. It's socially wasteful to add a subsidy to an existing industry, because a subsidy leads to a deadweight loss (unless there are offsetting positive externalities, which are not apparent in this case). However, if a large enough proportion of gaming developers were really going to move to Australia, the loss of economic welfare from the lost industry could (in theory) be larger than the deadweight loss of the subsidy. That might justify a subsidy.
However, that brings us to the second issue - how much should government be willing to pay to keep a gaming development industry that is threatening to move overseas. Certainly, the government shouldn't be willing to pay more than the total economic welfare that the industry generates (or, more accurately, the economic welfare that the proportion of the industry that would otherwise move overseas generates). Paying just enough so that the gaming development industry decides to stay would be the best option. A smart gaming development industry would recognise this, and play off governments against each other, leading to Tiebout competition. Tiebout competition is a 'race to the bottom', where governments compete to offer the most generous subsidies and other support, so that the gaming developers will operate in their country. This almost ensures that the 'winning' government would end up paying out all of the potential economic welfare gains directly to the gaming development industry itself.
But it gets worse. Since no government has a perfect understanding of just how much the gaming development industry is worth, the government that 'wins' the Tiebout competition will almost certainly to be the government that most over-estimates the value of the gaming development industry. This is what is referred to as the winner's curse. Over-estimating the value of the gaming development industry will mean over-incentivising it, paying too much relative to the economic welfare that it generates.
Thankfully, at this stage the New Zealand government hasn't fallen into this trap. Gaming developers don't need to be subsidised, and we definitely don't need to be in a race to the bottom to attract them here. It's bad enough that we do this for movie production, where it already doesn't pay off.
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