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The causal effects of an industrial policy

Criscuolo, Chiara, Martin, Ralf, Overman, Henry G. and Van Reenen, John (2016) The causal effects of an industrial policy. CEP Discussion Papers, CEPDP1113. Centre for Economic Performance (CEP), London School of Economics and Political Science, London, UK.

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Abstract

Business support policies designed to raise employment and productivity are ubiquitous around the world. We exploit changes in the area-specific eligibility criteria for a major program to support jobs through investment subsidies. Pan-European state aid rules determine whether a sub-national geographical area is eligible for subsidies, and we construct instrumental variables for area (and plant) eligibility based on the estimated parameters of these rule changes. We find areas eligible for business support create significantly more jobs (and reduce unemployment), and this is not due to job displacement between eligible and ineligible areas. An exogenous ten-percentage point increase in an area’s maximum investment subsidy stimulates about a 7% increase in manufacturing employment. The treatment effect exists solely for small firms – large companies appear to “game” the system, accepting subsidies without increasing activity. There are positive effects on net entry of new plants, firm investment but no effects on Total Factor Productivity.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2016 The Authors
Library of Congress subject classification: H Social Sciences > HC Economic History and Conditions
Journal of Economic Literature Classification System: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies
L - Industrial Organization > L5 - Regulation and Industrial Policy > L52 - Industrial Policy; Sectoral Planning Methods
L - Industrial Organization > L5 - Regulation and Industrial Policy > L53 - Government Promotion of Firms
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output (Income) Convergence
Sets: Departments > Geography and Environment
Research centres and groups > Spatial Economics Research Centre
Research centres and groups > Centre for Economic Performance (CEP)
Research centres and groups > What Works Centre for Local Economic Growth (WWG)
Identification Number: CEPDP1113
Project and Funder Information:
Project IDFunder NameFunder ID
ES/H010866/1Economic and Social Research Councilhttp://dx.doi.org/10.13039/501100000269
ES/H010866/1British Academyhttp://dx.doi.org/10.13039/501100000286
Funders: Economic and Social Research Council (ESRC), Department for Business, Innovation & Skills (BIS) , Welsh Assembly Government
Date Deposited: 31 Jul 2014 14:15
URL: http://eprints.lse.ac.uk/58575/

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