Jobless capital? The role of capital subsidies

• Investigates mechanisms limiting job creation from non-tax capital incentives.
• Outlines theory predicting capital-labor substitution and changing industry mix.
• Empirical tests use panel data and structural variation in state constitutions.
• Capital subsidies increase capital expenditure and change local industry mix.
• They also increase capital expenditure per employee and decrease employment density.

Using tax abatements, financial incentives, and public investments to attract (or retain) firms is the primary economic development tool for many local governments. Often local job creation policies focus on increasing capital through grants, low-interest financing, and other economic development incentives. Theory predicts that capital subsidies induce firm behaviors that limit their job creation effects. This paper employs the Incentives Environment Index, constructed from state constitutional provisions that limit and structure the ability of state and local governmental entities to aid private enterprises, and county panels to test theoretical predictions on county capital expenditure and input mixes as well as industry establishment shares. The results indicate the act of increasing capital subsidy tools is associated with capital-labor substitution, decreased employment density, and changes in local industry mix. Results are robust to alternative empirical specifications and measures of capital subsidy availability.