Do Local Production Subsidies Spur New Innovation Hubs?

Benjamin Hyman, Business Economics and Public Policy, The Wharton School

Abstract: The extent to which local incentive policies (such as subsidies and tax credits) are effective at spurring new centers of innovation, and whether these incentives induce overall productivity growth or just a shift of production from one region to another, is the subject of this proposal. In this paper, I leverage rich firm-level data from the universe of applicants to the California Film Commission tax credit lottery — a large-scale subsidy program which allocated over $800 million in tax credits from 2009 to 2015 to films ($2.5 million to the average winner) — to track how randomly winning and losing large tax credits influence firm location decisions across different cities. Doing so allows me to identify whether lottery losers — when they “randomly” enter a new city — generate productivity spillovers to upstream suppliers in those cities, relative to otherwise equivalent lottery winners in California. In other words, this paper is fundamentally concerned with if and how upstream suppliers learn from downstream entrants, and whether the magnitude of that learning implies an important role for local subsidization strategies in innovation.

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