Micro- and Macroeconomic Impacts of a Place-Based Industrial Policy

Abstract

We investigate the impact of a set of place-based subsidies introduced in Turkey in 2012. Using firm-level balance-sheet data along with data on the domestic production network, we first assess the policy’s direct and indirect impacts. We find an increase in economic activity in industry-province pairs that were the focus of the subsidy program, and positive spillovers to the suppliers and customers of subsidized firms. With the aid of a dynamic multi-region, multi-industry general equilibrium model, we then assess the program’s impacts. Based on the calibrated model we find that, in the long run, the subsidy program is modestly successful in reducing inequality between the relatively under-developed and more prosperous portions of the country. These modest longerterm effects are due to the ability of households to migrate in response to the subsidy program and to input-output linkages that traverse subsidy regions within Turkey.

JEL Classification: D57, F16, H25, J38, R12