Strategic interaction and the adoption of tax increment financing

This paper examines municipalities' Tax Increment Financing (TIF) adoption decision. In particular, the paper examines if municipalities engage in strategic interaction when making the adoption decision and if municipalities use TIF to capture tax revenue from overlapping jurisdictions. The underlying motivation for testing the strategic interaction hypothesis is to determine whether the popularity of TIF is partly the result of competition among neighboring municipalities for private development. The results show that municipalities do engage in strategic interaction in their TIF adoption decision, but municipalities do not use TIF to capture revenue from overlapping jurisdictions.