Direct, Spillover and Welfare Effects of Regional Firm Subsidies

80 Pages Posted: 25 May 2021

See all articles by Sebastian Siegloch

Sebastian Siegloch

IZA Institute of Labor Economics; University of Mannheim - Department of Economics; ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research; CESifo (Center for Economic Studies and Ifo Institute)

Nils Wehrhöfer

University of Mannheim Graduate School of Economic and Social Sciences, Students

Tobias Etzel

Deutsche Bundesbank

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Abstract

We analyze the effects of a large place-based policy, subsidizing up to 50% of investment costs of manufacturing firms in East Germany after reunification. We show that a 1-percentage-point decrease in the subsidy rate leads to a 1% decrease in manufacturing employment. We document important spillovers for untreated sectors in treated counties, untreated counties connected via trade and local taxes, whereas we do not find spillovers on counties in the same local labor market. We show that the policy is at least as efficient as cash transfers to the unemployed, but is more effective in curbing regional inequality.

JEL Classification: H24, J21, J23

Suggested Citation

Siegloch, Sebastian and Wehrhöfer, Nils and Etzel, Tobias, Direct, Spillover and Welfare Effects of Regional Firm Subsidies. IZA Discussion Paper No. 14362, Available at SSRN: https://ssrn.com/abstract=3851035

Sebastian Siegloch (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research ( email )

United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Nils Wehrhöfer

University of Mannheim Graduate School of Economic and Social Sciences, Students ( email )

Mannheim
Germany

Tobias Etzel

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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