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Jobless capital? The role of capital subsidies

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  • Patrick, Carlianne
Abstract
Using tax abatements, financial incentives, and public investments to attract (or retain) firms is the primary economic development tool for many local governments. Often local job creation policies focus on increasing capital through grants, low-interest financing, and other economic development incentives. Theory predicts that capital subsidies induce firm behaviors that limit their job creation effects. This paper employs the Incentives Environment Index, constructed from state constitutional provisions that limit and structure the ability of state and local governmental entities to aid private enterprises, and county panels to test theoretical predictions on county capital expenditure and input mixes as well as industry establishment shares. The results indicate the act of increasing capital subsidy tools is associated with capital-labor substitution, decreased employment density, and changes in local industry mix. Results are robust to alternative empirical specifications and measures of capital subsidy availability.

Suggested Citation

  • Patrick, Carlianne, 2016. "Jobless capital? The role of capital subsidies," Regional Science and Urban Economics, Elsevier, vol. 60(C), pages 169-179.
    • Handle: RePEc:eee:regeco:v:60:y:2016:i:c:p:169-179
    DOI: 10.1016/j.regsciurbeco.2016.07.009
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    1. Freedman, Matthew & Khanna, Shantanu & Neumark, David, 2023. "JUE Insight: The Impacts of Opportunity Zones on Zone Residents," Journal of Urban Economics, Elsevier, vol. 133(C).
    2. Augusto Cerqua & Guido Pellegrini, 2020. "Labor mobility effects of a firm-level shock," Working Papers 1/20, Sapienza University of Rome, DISS.
    3. Carlianne Patrick, 2014. "Does Increasing Available Non-Tax Economic Development Incentives Result in More Jobs?," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(2), pages 351-386, June.
    4. Freedman, Matthew & Khanna, Shantanu & Neumark, David, 2023. "Combining rules and discretion in economic development policy: Evidence on the impacts of the California Competes Tax Credit," Journal of Public Economics, Elsevier, vol. 217(C).
    5. Carlianne Patrick & Heather M. Stephens, 2020. "Incentivizing the Missing Middle: The Role of Economic Development Policy," Economic Development Quarterly, , vol. 34(2), pages 154-170, May.
    6. Mikhail Ivonchyk, 2022. "Local Economic Development Policies and Business Activity: Dynamic Panel Data Analysis of All County Governments in the State of Georgia," Economic Development Quarterly, , vol. 36(2), pages 92-107, May.
    7. Carlianne Patrick & Amanda Ross & Heather Stephens, 2016. "Designing Policies to Spur Economic Growth: How Regional Scientists Can Contribute to Future Policy Development and Evaluation," Working Papers 16-04, Department of Economics, West Virginia University.
    8. Rupasingha, Anil & Pender, John & Wiggins, Seth, 2018. "USDA’s Value-Added Producer Grant Program and Its Effect on Business Survival and Growth," Economic Research Report 276236, United States Department of Agriculture, Economic Research Service.
    9. Kaitlyn R. Harger & Amanda Ross & Heather M. Stephens, 2015. "What Matters More for Economic Development, the Amount of Funding or the Number of Projects Funded? Evidence from the Community Development Financial Investment Fund," Working Papers 15-51, Department of Economics, West Virginia University.
    10. Amanda Ross & Kaitlyn Wolf, 2014. "Do Market-Based Tax Incentives Attract New Businesses? Evidence from the New Markets Tax Credit," ERSA conference papers ersa14p653, European Regional Science Association.
    11. Einiö, Elias & Overman, Henry G., 2020. "The effects of supporting local business: Evidence from the UK," Regional Science and Urban Economics, Elsevier, vol. 83(C).
    12. Mark Partridge & Sydney Schreiner & Alexandra Tsvetkova & Carlianne Elizabeth Patrick, 2020. "The Effects of State and Local Economic Incentives on Business Start-Ups in the United States: County-Level Evidence," Economic Development Quarterly, , vol. 34(2), pages 171-187, May.
    13. Kaitlyn Harger & Amanda Ross, 2016. "Do Capital Tax Incentives Attract New Businesses? Evidence Across Industries From The New Markets Tax Credit," Journal of Regional Science, Wiley Blackwell, vol. 56(5), pages 733-753, November.
    14. Cerqua, Augusto & Pellegrini, Guido, 2022. "Decomposing the employment effects of investment subsidies," Journal of Urban Economics, Elsevier, vol. 128(C).

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    More about this item

    Keywords

    Economic development incentives; Capital subsidies; Capital-labor substitution; Industry composition;
    All these keywords.

    JEL classification:

    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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