Jobless Capital? The Role of Capital Subsidies

Carlianne Patrick

No 15-237, Upjohn Working Papers from W.E. Upjohn Institute for Employment Research

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.

Keywords: economic development incentives; capital subsidies; capital-labor substitution (search for similar items in EconPapers)
JEL-codes: H25 R11 R32 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Jobless capital? The role of capital subsidies (2016)
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