It is now widely accepted that the institutional interventions of states are a foundational influence on the dynamics of organizational forms. But why do states act? In this paper, we apply the behavioral theory of the firm to develop an explanation of state actions based on the fact that they are boundedly rational rivals. The instrument of state competition we examine is the founding of business incubators, a primary tool in the entrepreneurial strategy of economic development. We predict that business incubators are more likely to be founded in a state when (1) the state falls behind comparable states in the indicators of economic development; (2) the state falls behind its own historical trajectories of economic development; (3) the state has slack resources in the form of budget surpluses; (4) comparable and rivalry states adopt incubators as a development strategy. Our analysis of incubator foundings in New York, New Jersey and Pennsylvania throughout 1980–2004 supports all of these propositions.