American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Direct and Indirect Effects of Investment Tax Incentives
American Economic Review
(pp. 2781–2818)
Abstract
This paper estimates the direct effects and indirect spillover effects of investment tax credits on firms. Exploiting a differential tax credit rate change by firm size in the German manufacturing sector, I find that lowering a firm's investment cost by 7.6 percent increases its capital stock by 17.7 percent and employment by 12.0 percent. Positive local spillovers generate one additional manufacturing job for each directly created job, are strongest between firms in industries connected through input-output linkages, and arise within distances of five kilometers. Firms dependent on local consumer demand also increase employment, while within-industry spillovers generate small negative effects.Citation
Lerche, Adrian. 2025. "Direct and Indirect Effects of Investment Tax Incentives." American Economic Review 115 (8): 2781–2818. DOI: 10.1257/aer.20220656Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H32 Fiscal Policies and Behavior of Economic Agents: Firm
- J23 Labor Demand
- L25 Firm Performance: Size, Diversification, and Scope
- L60 Industry Studies: Manufacturing: General
- R11 Regional Economic Activity: Growth, Development, Environmental Issues, and Changes