Direct, Spillover and Welfare Effects of Regional Firm Subsidies

Abstract

We analyze the effects of a large place-based policy, subsidizing up to 50% of investment costs of manufacturing firms in East Germany after reunification. We show that a 1-percentage-point decrease in the subsidy rate leads to a 1% decrease in manufacturing employment. We document important spillovers for untreated sectors in treated counties, untreated counties connected via trade and local taxes, whereas we do not find spillovers on counties in the same local labor market. We show that the policy is at least as efficient as cash transfers to the unemployed, but is more effective in curbing regional inequality.

Employment Effects of Investment Grants and Firm Heterogeneity – Evidence from a Staggered Adoption Approach

“…Our findings suggest that the programme has achieved its goals in terms of safeguarding existing and creating new jobs particularly in East Germany, which is mostly targeted by this policy. Our result is consistent to the findings of Siegloch et al (2021) who also present positive effects at the regional level. 23 The result for the subsample of treated establishments in less disadvantaged regions is not interpretable.…”

“…23 Siegloch et al (2021) calculate costs per job of e 19,935. The remarkable difference to our study might be explained as follows.…”

“…2 The pros and cons discussed in the literature highlight the demand for credible empirical evaluation studies that address the above mentioned arguments taking into account specific regional features. Recent studies mainly show that investment grants in disadvantaged regions positively influence key figures of regional economic development, such as private-sector investments, employment, and productivity (Brachert et al 2019, de Castris and Pellegrini 2012, Criscuolo et al 2019, Eberle et al 2019, Siegloch et al 2021, Wardenburg and Brenner 2019. However, for selected place-based investment policies in (the South of) Italy, the literature also provides evidence on negative effects on the regional economic performance (e. g. Accetturo et al 2020, Accetturo and de Blasio 2012, Andini and de Blasio 2016.…”