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The Effects of Capital Subsidization on Israeli Industry

  • Arie Bregman
  • Melvyn Fuss
  • Haim Regev
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    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 (including that portion which was subsidized) than firms that were not subsidized.

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    File URL: http://www.nber.org/papers/w6788.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6788.

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    Date of creation: Nov 1998
    Date of revision:
    Publication status: published as Bank of Israel Economic Review, Vol. 72 (1999): 77-101.
    Handle: RePEc:nbr:nberwo:6788
    Note: PR
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. 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.
    2. Bregman, Arie & Fuss, Melvyn & Regev, Haim, 1995. "The production and cost structure of Israeli industry Evidence from individual firm data," Journal of Econometrics, Elsevier, vol. 65(1), pages 45-81, January.
    3. Bregman, Arie & Fuss, Melvyn & Regev, Haim, 1991. "High tech and productivity: Evidence from Israeli industrial firms," European Economic Review, Elsevier, vol. 35(6), pages 1199-1221, August.
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