Spillover, Efficiency, and Equity Effects of Regional Firm Subsidies

We analyze the effects of a large place-based policy, subsidizing up to 50 percent of the investment costs of East German manufacturing plants. We show that a 1 percentage point decrease in subsidy rate leads to a 1 percent decrease in manufacturing employment. We document important local spillovers for the untreated construction and retail sectors, counties connected via trade, and local tax rates. There is no evidence for regional reallocation, within-firm spillover, or changes in commuting and residential decisions. The cost per job amounts to about $19,000. We show local subsidies are substantially more effective in curbing regional inequality than place-blind policies. (JEL G31, H71, L60, L74, L81, R23, R51)