Firm Responsiveness to Location Subsidies: Regression Discontinuity Estimates from a Tax Credit Formula

Benjamin Hyman, Federal Reserve Bank of New York; Matthew Freedman, University of California, Irvine; and David Neumark, University of California, Irvine

Abstract: In 2011, California Governor Jerry Brown recognized several of the state’s existing firm incentive policies aimed at catalyzing innovative activity in the state, to be ineffectual, citing poor incentive design – especially in the state’s main incentive vehicle, its California Enterprise Zone (CEZ) program – for lackluster outcomes associated with the policy. By 2013, the policy had been replaced by a state-wide $700 million investment incentive fund – better known as Cal Competes (2013-2019), designed to allocate funding via a competitive formula that would purportedly target only the most innovative and employment intensive firms through a competitive bidding process. The primary goal of this project is to compare the effects of this “innovation-targeted” incentive program to a prior random allocation mechanism (the California motion picture tax credit lottery 2009 – 2015) as a counterfactual. Analyzing hundreds of applicants to the program including winners such as Tesla, Macy’, Aetna, Credit Karma, Alibaba USA, as well as less visible firms, I compare effects on firm productivity, firm patents and revenue, employment and wage outcomes, and relocation probability. I use a Regression Discontinuity Design that exploits the threshold application “score” used for accepting firm applicants as quasi-random variation to analyze each program’s allocative efficiency.

Michelle Eckert is Marketing and Communications Coordinator for the Mack Institute, where she works to engage students, researchers, and corporate partners in opportunities for collaboration. Michelle received her B.A. in Art from Valparaiso University in 2007. Her background includes two AmeriCorps terms of service working to teach mathematics, computer literacy, and job readiness skills to out-of-school youth in Philadelphia, focusing particularly on promoting access to post-secondary education.