Beyond the SUTVA: How Industrial Policy Evaluations Change When We Allow for Interactions Among Firms

Investment subsidies to private firms have been one of the most popular place-based policies in developed countries; however, the empirical evidence to date is still mixed and there is no general consensus on the effectiveness of such policy. Most evaluation studies have focused on the policy impact on subsidised firms, whereas the possible spillovers on other firms have been mostly overlooked. This is due to the dependence of these analyses on the Stable Unit Treatment Value Assumption (SUTVA), i.e. they assume away any possible interactions between subsidised and non-subsidised firms. We propose a new approach that allows to consistently estimate not only the ATT, but also spillover parameters contrasting the positive agglomeration effect with the negative cross-sectional substitution and the crowding-out effect. Econometrically we adopt a Matching difference-in-differences (MDID) using the recent coarsened exact matching (CEM). Our application concerns the Italian Law 488 (L488). We find that capital subsidies engender a growth process in the eligible area in terms of investment but not with respect to employment. Indeed, the positive effect on employment for subsidised firms is entirely compensated by the negative effect on eligible but unsubsidised firms.