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Spillover, Efficiency, and Equity Effects of Regional Firm Subsidies

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  • Sebastian Siegloch
  • Nils Wehrhöfer
  • Tobias Etzel

Abstract

We analyze the effects of a large place-based policy, subsidizing up to 50 percent of the investment costs of East German manufacturing plants. We show that a 1 percentage point decrease in subsidy rate leads to a 1 percent decrease in manufacturing employment. We document important local spillovers for the untreated construction and retail sectors, counties connected via trade, and local tax rates. There is no evidence for regional reallocation, within-firm spillover, or changes in commuting and residential decisions. The cost per job amounts to about $19,000. We show local subsidies are substantially more effective in curbing regional inequality than place-blind policies.

Suggested Citation

  • Sebastian Siegloch & Nils Wehrhöfer & Tobias Etzel, 2025. "Spillover, Efficiency, and Equity Effects of Regional Firm Subsidies," American Economic Journal: Economic Policy, American Economic Association, vol. 17(1), pages 144-180, February.
    • Handle: RePEc:aea:aejpol:v:17:y:2025:i:1:p:144-80
    DOI: 10.1257/pol.20220667
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • L74 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Construction
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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