Developments in the evaluation of capital subsidy policies

Essay 1: A critical survey on capital subsidy policies. Despite the long history of capital subsidies in most developed countries and the numerous evaluations of their effectiveness, there is no comprehensive survey in the literature. This essay aims to provide a complete review of the most relevant research works in such literature highlighting their main findings. Besides, the core threats to internal validity and the main issues that a researcher has to face in order to deliver a robust evaluation work are stressed. Essay 2: The causal impact of capital subsidies: a multiple regression discontinuity design approach. This essay analyses the impact of a policy instrument - Law 488/92 (L488), the main Italian regional policy - that allocates subsidies to private firms by a multiple ranking system. Thanks to the peculiar L488 selection process that creates the conditions for a local random experiment, we are able to assess the effectiveness of these types of incentives for a relevant subgroup of firms. We propose a nonparametric multiple rankings regression discontinuity design that exploits the sharp discontinuities in the L488 rankings and extends the regression discontinuity design (RDD) approach to a context where the treatment is assigned by multiple rankings with different cut-off points. We find that the impact of the subsidies on employment, investment, and turnover is positive and statistically significant, while the effect on productivity is mostly negligible. The new subsidised capital is additional but non-complementary with the owner-financed investment. The results are robust to different specifications and not due to intertemporal substitution. Essay 3: Beyond the SUTVA: how policy evaluations change when we allow for interactions among firms. The shortage of studies on spatial spillovers of industrial policies is rather surprising considering that such policies are usually designed for generating spatial externalities. In Essay 3 we try to fill this gap proposing a new framework that partially relaxes the SUTVA assuming that a firm might interact only with firms having a limited economic distance from it (e.g. firms that belong to the same sector of activity) and that the intensity of these interactions is diminishing in distance and it does not extend over a certain threshold. This allows us to contrast the positive agglomeration effects with the negative cross-sectional substitution and the crowding-out effect. The global evaluation of the ATT and the spillover parameters shifts the spotlight from the policy effect on subsidised firms to the global effect of the industrial policy on the targeted territory making possible to determine if the subsidies have had a welfare-enhancing role in the underdeveloped regions. Analysing the effectiveness of the Italian L488 policy on firms located in peripheral areas, we find - in line with most of the literature - a positive and large effect of the policy on subsidised firms in terms of investment, turnover, and employment; however, the employment growth is in part determined to the detriment of affected untreated firms located in the very proximity of one or more treated firms that belong to the same sector of activity. This finding suggests that the ATT on itself is not a sufficient parameter to evaluate the effectiveness of an industrial policy and that we cannot rule out the possibility that the substitution effect (firms substitute labour with capital) might be in place.