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Impact of the enterprise zone

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  • Sridhar, Kala Seetharam

    (National Institute of Public Finance and Policy)

Abstract

Enterprise zones are place-oriented policies that are a tool of regional development, and refer to geographically targeted areas chosen for development that are designated on the basis of unemployment, poverty, population, age of housing stock, and other criteria. Firms that locate in the area and create jobs are given tax credits, abatements and exemptions. The underlying assumption is that firms and employees in the zone area benefit because of a reduction in the price of capital and/or labour, and there is expanded investment and employment generation through deregulation. The objective of this work is to answer what is the impact of the enterprise zone (EZ) on the rest of the economy and labour. I develop a theoretical model. In the model I point to the cause of unemployment in the EZ. I show the relationship between the reservation wage and unemployment rate, following Jones (1989). I then show the general equilibrium response to the tax abatement provided in EZs, in a generalised framework incorporating capital mobility, following Harberger (1962). The analytical framework developed indicates that the capital and employment impact of the tax cut on capital in the EZ depends on three sets of parameters: · Relative factor intensities of firms in the two areas. · The elasticity of substitution between capital and labour in firms in the areas. · The price elasticities of demand for goods Z and Y produced by EZ firms and non-EZ firms respectively The analysis also indicates that it is impossible to isolate the incidence of the tax cut given in the EZ just to the EZ alone.

Suggested Citation

  • Sridhar, Kala Seetharam, 2004. "Impact of the enterprise zone," Working Papers 04/19, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:04/19
    Note: Working Paper 19, 2004
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Enterprise zones ; Regional development ; Tax incentives;
    All these keywords.

    JEL classification:

    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

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