Jobless Capital? The Role of Capital Subsidies

Authors

Carlianne E. Patrick, Georgia State University

Series

Upjohn Institute working paper ; 15-237

**Published Version**

In Regional Science and Urban Economics 60: 169-179

DOI

10.17848/wp15-237

Issue Date

October 2015

Abstract

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.

Sponsorship

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

Subject Areas

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