Beyond the SUTVA: How Industrial Policy Evaluations Change When We Allow for Interactions Among Firms

Sapienza University of Rome School of Economics Working Paper No. 15

29 Pages Posted: 31 May 2013

See all articles by Augusto Cerqua

Augusto Cerqua

University of Westminster

Guido Pellegrini

University of Rome I

Date Written: May 22, 2013

Abstract

Investment subsidies to private firms have been one of the most popular place-based policies in developed countries; however, the empirical evidence to date is still mixed and there is no general consensus on the effectiveness of such policy. Most evaluation studies have focused on the policy impact on subsidised firms, whereas the possible spillovers on other firms have been mostly overlooked. This is due to the dependence of these analyses on the Stable Unit Treatment Value Assumption (SUTVA), i.e. they assume away any possible interactions between subsidised and non-subsidised firms. We propose a new approach that allows to consistently estimate not only the ATT, but also spillover parameters contrasting the positive agglomeration effect with the negative cross-sectional substitution and the crowding-out effect. Econometrically we adopt a Matching difference-in-differences (MDID) using the recent coarsened exact matching (CEM). Our application concerns the Italian Law 488 (L488). We find that capital subsidies engender a growth process in the eligible area in terms of investment but not with respect to employment. Indeed, the positive effect on employment for subsidised firms is entirely compensated by the negative effect on eligible but unsubsidised firms.

Keywords: SUTVA, spillovers, policy evaluation, public subsidies, business support policy

JEL Classification: C14, H23, R58

Suggested Citation

Cerqua, Augusto and Pellegrini, Guido, Beyond the SUTVA: How Industrial Policy Evaluations Change When We Allow for Interactions Among Firms (May 22, 2013). Sapienza University of Rome School of Economics Working Paper No. 15, Available at SSRN: https://ssrn.com/abstract=2272696 or http://dx.doi.org/10.2139/ssrn.2272696

Augusto Cerqua (Contact Author)

University of Westminster ( email )

35 Marylebone Road
London, NW1 5LS
United Kingdom

Guido Pellegrini

University of Rome I ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

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