Do subsidies to private capital boost firms' growth? A multiple regression discontinuity design approach

• We estimate the causal effect of capital subsidies to firms in lagged regions.
• Exploiting a peculiar assignment mechanism we have a local randomised experiment.
• Investment and turnover grow rapidly in subsidised firms.
• We find evidence against the intertemporal substitution assumption.
• The impact on employment is positive, while labour productivity does not grow.

There is still little consensus among economists on the effectiveness of business support policies. The evaluation of such policies requires a reliable identification procedure that is hardly achieved in empirical studies. We analyse 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.