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  5. Spillover, Efficiency and Equity Effects of Regional Firm Subsidies

Spillover, Efficiency and Equity Effects of Regional Firm Subsidies

  • Sebastian Siegloch
  • Nils Wehrhöfer
  • Tobias Etzel
American Economic Journal: Economic Policy (Forthcoming)

Abstract

We analyze the effects of a large place-based policy, subsidizing up to 50% of the investment costs of manufacturing plants in East Germany. We show that a one-percentage-point decrease in the subsidy rate leads to a 1% 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 that local subsidies are substantially more effective in curbing regional inequality than place-blind policies.

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