Upjohn Institute working paper ; 15-237

**Published Version**

Regional Science and Urban Economics 60 (September 2016): 169-179




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.

Issue Date

October 2015


W.E. Upjohn Institute for Employment Research, Early Career Research Award grant 13-141-07

Subject Areas

ECONOMIC DEVELOPMENT; Regional policy and planning; Business and tax incentives




Patrick, Carlianne. 2015. "Jobless Capital? The Role of Capital Subsidies." Upjohn Institute Working Paper 15-237. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.