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

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 longer-term program’s aggregate impacts. We find that subsidies reduced regional real wage inequality, but only modestly. These modest longer-term 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. JEL Codes: D57, F16, H25, J38, R12 ∗Atalay: Research Department, Federal Reserve Bank of Philadelphia, atalayecon@gmail.com; Hortaçsu: Department of Economics, University of Chicago, hortacsu@uchicago.edu; Runyun: Department of Economics, Boston College, runyun.mustafa@gmail.com; Syverson: University of Chicago Booth School of Business, chad.syverson@chicagobooth.edu; Ulu: College of Administrative Sciences and Economics, Koç University, mulu@ku.edu.tr. Ulu thanks TÜBİTAK (Türkiye Bilimsel ve Teknolojik Araştırma Kurumu; the Scientific and Technological Research Council of Turkey) for financial support related to this project. We also thank seminar audiences at Columbia, Cornell, the Federal Reserve Bank of Philadelphia, Georgetown, Nottingham, Princeton, UC Santa Cruz, the 2022 SED Meetings, and Wharton; Ramazan Seyfeli, Onur Sarıkaya, Elif Tuğçe, Çınar İlker, Murat Ar, and Mehmet Fatih Kacır; and staff at the Turkish Entrepreneur Information System, part of the Turkish Ministry of Industry and Technology. The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

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