Micro- and Macroeconomic Impacts of a Place-Based Industrial Policy

Joint Applied Micro Seminar

Abstract:
We investigate the impact of a set of place-based subsidies introduced in Turkey. These policies were introduced in 2012 with the aim of spurring investment and reducing regional income inequality, and include a mix of investment tax credits and reduced mandatory social security contributions. Using firm-level balance-sheet data along with data on the domestic production network, we first assess the direct and indirect impacts of the 2012 subsidy program. We find an increase in economic activity in industry-province pairs that were the focus of the subsidy program, and positive spillovers to the suppliers and customers of subsidized firms. With the aid of a dynamic multi-region, multi-industry general equilibrium model, we then assess the program’s aggregate impacts. We find that subsidies reduced regional real wage inequality, but only modestly. These modest effects are due to the ability of households to migrate in response to the subsidy program and input-output linkages that traverse subsidy regions within Turkey.