Place-Based Development and Inequality in Puerto Rico

Literature Review Place-Based Development and Inequality in Puerto Rico Puerto Ricos contemporary economic development strategy has relied heavily on place-based tax incentives designed to attract external capital and high-income individuals. Scholars have long noted that such strategies emerge in contexts of structural economic constraint, where limited fiscal autonomy and prolonged recession shape policy choices (Dietz, 2003; Maldonado & Melndez, 2019). In Puerto Rico, these constraints have produced development models that prioritize investment attraction over redistribution, raising concerns about the uneven spatial and social distribution of benefits. Research on Puerto Ricos political economy emphasizes that development outcomes are rarely uniform across space. Instead, growth and investment tend to concentrate in already advantaged locations, particularly coastal zones and urban-adjacent areas with high amenity value (Maldonado & Melndez, 2019). These spatially uneven development patterns provide a critical backdrop for evaluating the distributional consequences of tax incentive policies such as Act 22 and its later consolidation under Act 60. Act 22 / Act 60 and Investor-Oriented Tax Incentives Acts 20 and 22, and their subsequent consolidation under Act 60, were designed to encourage business relocation and individual investor migration by offering preferential tax treatment. While proponents argue that these incentives stimulate economic activity and generate employment, critics contend that investor-oriented tax policies may disproportionately benefit high-income newcomers while providing limited spillover benefits to local populations (Gould, 2017; Rodrguez-Cotto, 2020). Empirical and policy-oriented analyses suggest that Act 22/60 participation is spatially concentrated, with investors clustering in select ZIP codes rather than distributing evenly across the island. This concentration raises concerns that incentive-driven investment may intensify localized housing demand and contribute to widening income disparities within receiving communities (Rodrguez-Cotto, 2020). However, systematic quantitative evaluations of these distributional effects at fine geographic scales remain limited, motivating further empirical investigation. Housing Markets, Gentrification, and Inequality A substantial body of urban scholarship links investment inflows to housing market transformation and displacement risk. Gentrification theory emphasizes how capital reinvestment in urban neighborhoods can produce rising housing costs, demographic shifts, and exclusionary outcomes, particularly for lower-income residents (Smith, 1996). Subsequent empirical research has documented how public and private investment can function as a catalyst for neighborhood change, often reinforcing existing inequalities rather than alleviating them (Zuk et al., 2018). In Puerto Rico, housing-market pressures have been shaped by a combination of investor demand, tourism expansion, post-disaster recovery, and constrained housing supply. Studies examining housing affordability on the island highlight that rising costs disproportionately burden long-term residents and lower-income households, raising the risk that incentive-driven development may exacerbate inequality through housing-market mechanisms (Maldonado & Melndez, 2019). These dynamics underscore the importance of incorporating housing controls when assessing the inequality implications of Act 60 exposure. Income Inequality and Fine-Scale Spatial Analysis Understanding inequality dynamics requires attention to geographic scale. Research demonstrates that income inequality and segregation often manifest more strongly at neighborhood or sub-municipal levels than at broader regional scales (Reardon & Bischoff, 2011). Fine-scale analysis allows researchers to capture localized processes that may be obscured by aggregate measures. ZIP-level analysis, while not without limitations, has been widely used in studies of neighborhood change and inequality due to its ability to capture sub-municipal variation while maintaining data availability across time (Galster, 2012). In the context of Puerto Rico, where municipalities encompass diverse neighborhoods with distinct housing and economic profiles, ZIP-level analysis provides a practical and analytically meaningful unit for examining inequality outcomes associated with policy exposure. Place-Based Tax Incentives in the Broader U.S. Context The broader U.S. literature on place-based tax incentives provides important context for evaluating Act 60. Studies of business incentives and tax expenditures consistently find mixed evidence regarding their effectiveness in promoting inclusive growth (Neumark & Simpson, 2015; Bartik, 2017). While incentives may influence firm or investor location decisions, their broader distributional impacts are often limited, particularly when investments concentrate in already competitive locations. Research further suggests that incentive-driven development may reinforce spatial inequality when benefits accrue to mobile capital rather than local labor or residents (Bartik, 2017). These findings parallel concerns raised in the Puerto Rican context and highlight the need to assess not only whether investment occurs, but where it occurs and how it interacts with existing socioeconomic conditions. Longitudinal Approaches to Neighborhood Change Neighborhood socioeconomic conditions evolve over time, making longitudinal approaches essential for evaluating policy impacts. Panel data methods allow researchers to model within-place change while accounting for unobserved, time-invariant characteristics that may influence outcomes (Wooldridge, 2010; Baltagi, 2008). Such approaches are particularly valuable in contexts where baseline conditions differ substantially across locations, as is the case in Puerto Rico. Mixed-effects panel models further enable the analysis of repeated observations while accommodating correlated errors across time. Prior research demonstrates that longitudinal designs improve inference in studies of inequality and neighborhood change by distinguishing temporal dynamics from cross-sectional differences (Wooldridge, 2010). Spatial Spillovers and Policy Diffusion A growing body of literature emphasizes that socioeconomic processes do not respect administrative boundaries. Spatial spillover frameworks recognize that investment, housing demand, and demographic change in one location may influence outcomes in neighboring areas through market interactions and mobility (Anselin, 1988; LeSage & Pace, 2009). Ignoring such spillovers can lead to incomplete or biased estimates of policy effects. Studies incorporating spatial dependence into analyses of neighborhood change demonstrate that spillover effects are particularly relevant for place-based policies that cluster geographically (Galster, 2012). In the context of Act 60, spatial spillovers may arise as investor activity in one ZIP code affects housing markets, labor dynamics, or inequality in adjacent ZIP codes, reinforcing the need for spillover-aware analytical frameworks. Summary and Research Gap Taken together, the literature suggests that investor-oriented tax incentives may generate concentrated development benefits while raising concerns about housing affordability and income inequality. However, empirical evidence evaluating these relationships at fine geographic scales and over time remains limited, particularly in the Puerto Rican context. Existing studies often rely on cross-sectional designs or aggregate units that obscure localized dynamics. This thesis addresses these gaps by employing a ZIP Year panel framework that integrates direct Act 60 exposure, temporal dependence, and spatial spillovers to examine the relationship between investor activity and income inequality across Puerto Rico. By combining distribution-based inequality measurement with longitudinal and spatially informed analysis, the study contributes to ongoing debates about the equity implications of place-based development policies.