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Direct and Indirect Effects of Investment Tax Incentives

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  • Adrian Lerche

Abstract

This paper estimates the direct effects and indirect spillover effects of investment tax credits on firms. Exploiting a differential tax credit rate change by firm size in the German manufacturing sector, I find that lowering a firm's investment cost by 7.6 percent increases its capital stock by 17.7 percent and employment by 12.0 percent. Positive local spillovers generate one additional manufacturing job for each directly created job, are strongest between firms in industries connected through input-output linkages, and arise within distances of five kilometers. Firms dependent on local consumer demand also increase employment, while within-industry spillovers generate small negative effects.

Suggested Citation

  • Adrian Lerche, 2025. "Direct and Indirect Effects of Investment Tax Incentives," American Economic Review, American Economic Association, vol. 115(8), pages 2781-2818, August.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:8:p:2781-2818
    DOI: 10.1257/aer.20220656
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    References listed on IDEAS

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    1. Mary O'Mahony & Marcel P. Timmer, 2009. "Output, Input and Productivity Measures at the Industry Level: The EU KLEMS Database," Economic Journal, Royal Economic Society, vol. 119(538), pages 374-403, June.
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    Cited by:

    1. Lundberg, Jacob & Massenz, Gabriella, 2025. "Local Corporate Taxation and Business Activity," Working Paper Series 1531, Research Institute of Industrial Economics.
    2. Naihao Li & Ziyin Deng & Zijie Li, 2025. "Pay Dispersion and Firms’ Internationalization Strategy: Evidence from China," Management International Review, Springer, vol. 65(6), pages 1105-1136, December.

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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