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The Effects of Capital Subsidization on Israeli Industry

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  • Arie Bregman
  • Melvyn Fuss
  • Haim Regev
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    Abstract

    An industrial policy of subsidizing physical capital investment has been utilized in many countries in order to encourage export growth and spread economic development to outlying areas. For Israel, we possess a unique time series-cross section micro data set that details investment and its associated subsidies by vintage at the level of the individual enterprise for 620 firms. These data provide the means by which an empirical analysis of the effects of the policy of subsidizing capital can be undertaken. We estimate that, for the years 1990-94, this policy has resulted in production inefficiencies ranging from 5% for firms that receive the average level of subsidies to 15% for heavily subsidized firms. We also document the fact that much of the subsidization appears not to have been necessary, in the sense that subsidized firms generally have earned higher rates of return on their total physical capital (included that portion which was subsidized) than firms that were not subsidized.

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    File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-FUSS-98-01.pdf
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    Bibliographic Info

    Paper provided by University of Toronto, Department of Economics in its series Working Papers with number fuss-98-01.

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    Length: 35 pages
    Date of creation: 09 Jul 1998
    Date of revision:
    Handle: RePEc:tor:tecipa:fuss-98-01

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    1. Bregman, Arie & Fuss, Melvyn & Regev, Haim, 1995. "The production and cost structure of Israeli industry Evidence from individual firm data," Journal of Econometrics, Elsevier, Elsevier, vol. 65(1), pages 45-81, January.
    2. J K Swales, 1993. "Factor subsidies, employment generation, and cost per job: a partial equilibrium approach," Environment and Planning A, Pion Ltd, London, vol. 25(3), pages 317-338, March.
    3. Bregman, Arie & Fuss, Melvyn & Regev, Haim, 1991. "High tech and productivity: Evidence from Israeli industrial firms," European Economic Review, Elsevier, Elsevier, vol. 35(6), pages 1199-1221, August.
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    Cited by:
    1. Michael Beenstock & Daniel Felsenstein & Nadav Ben Zeev, 2011. "Capital deepening and regional inequality: an empirical analysis," The Annals of Regional Science, Springer, Springer, vol. 47(3), pages 599-617, December.
    2. Michael Beenstock & Daniel Felsenstein, 2003. "Decomposing the Dynamics of Regional Earnings Disparities in Israel," ERSA conference papers ersa03p90, European Regional Science Association.

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