Jobless Capital? The Role of Capital Subsidies

Upjohn Institute working paper ; 15-237

47 Pages Posted: 10 Oct 2015

See all articles by Carlianne Patrick

Carlianne Patrick

Georgia State University - Department of Economics

Date Written: October 8, 2015


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 five-year 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.

Keywords: e conomic development incentives, capital subsidies, capital-labor substitution

JEL Classification: R32, H25, R11

Suggested Citation

Patrick, Carlianne, Jobless Capital? The Role of Capital Subsidies (October 8, 2015). Upjohn Institute working paper ; 15-237, Available at SSRN: or

Carlianne Patrick (Contact Author)

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States
(404)413-0156 (Phone)

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