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Industrial policy at work: Evidence from Romania’s income tax break for workers in IT

Isabela Manelici and Smaranda Pantea

European Economic Review, 2021, vol. 133, issue C

Abstract: We study the firm and sector-level effects of an industrial policy designed to support the development of the IT sector in Romania. In 2001, Romania introduced an unexpected personal income tax break to programmers with eligible bachelor’s degrees and who work on software development for firms in eligible IT sector codes. In 2013, policy-makers suddenly expanded the scope of the original tax break to cover more bachelor’s degrees and sector codes in IT. We first use firm-level data and difference-in-difference designs around each policy episode to show that treated firms experience strong and long-lasting growth. We then employ sector-level data and a synthetic control design to show that after the introduction of this policy in 2001, the IT sector grew faster in Romania than in otherwise similar countries. Finally, downstream sectors relying more on IT services also grew faster in Romania after 2001. Our results suggest that this policy has been effective in promoting the development of the IT sector, a sector typically seen as key to the transition to a knowledge economy.

Keywords: Industrial policy; Firm growth; Economic development; Information technology; Labor income taxation; Central and eastern europe; Downstream effects (search for similar items in EconPapers)
JEL-codes: D22 D57 H24 L25 L86 O14 O25 O38 O52 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:133:y:2021:i:c:s0014292121000271

DOI: 10.1016/j.euroecorev.2021.103674

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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