What Matters More for Economic Development, the Amount of Funding or the Number of Projects Funded? Evidence from the Community Development Financial Investment Fund

Kaitlyn Harger, Amanda Ross () and Heather Stephens
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Kaitlyn Harger: Florida Gulf Coast University, Department of Economics
Heather Stephens: West Virginia University, Agricultural and Resource Economics

No 15-51, Working Papers from Department of Economics, West Virginia University

Abstract: Governments try to attract entrepreneurs to specific areas by providing incentives to new businesses that locate within their jurisdiction. However, there is a debate over how best to allocate these funds. Using establishment-level data from the National Establishment Time Series (NETS) database for California, and data on the location of disbursements from the Community Development Financial Institutions (CDFI) and New Market Tax Credit (NMTC) programs, we consider the effectiveness of these two programs in attracting new businesses to disadvantaged areas. Investors are eligible to receive funding through these programs if the census tract where they are located has a median family income less than or equal to 80% of the state’s median family income. Using this plausibly exogenous eligibility threshold, we find that higher levels of funding per project through the NMTC program result in an increase in the number of new establishments in that area. However, we find that the number of NMTC projects funded has no effect on attracting new firms to eligible tracts, and there is little evidence of a consistent effect of the CDFI program. The amounts of funding through the CDFI program are relatively small, though more projects were funded through this program than the NMTC. Thus, our findings suggest that the amount of funding allocated to these areas matters more for economic development than does the number of projects funded. In addition, we find that there are heterogenous effects with regard to the impact of these programs, specifically across different firm sizes and industries, suggesting that these policies may cause firms to reallocate and sort across census tracts.

Keywords: economic development; funding; projects; community development; financial investment fund (search for similar items in EconPapers)
Pages: 48 pages
Date: 2015-12
New Economics Papers: this item is included in nep-bec, nep-ent and nep-ppm
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Citations: View citations in EconPapers (1)

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