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Regional subsidies and industrial prospects of lagging regions

  • Carvalho, Alexandre
  • Lall, Somik V.
  • Timmins, Christopher

Large and sustained differences in economic performance across regions of developing countries have long provided motivation for fiscal incentives designed to encourage firm entry in lagging areas. But empirical evidence in support of these policies has been weak at best. The authors undertake a direct evaluation of the most prominent fiscal incentive policy in Brazil, the Fundos Constitucionais de Financiamento (Constitutional Funds). In doing so, they exploit valuable features of the Brazilian Ministry of Labor's RAIS data set to address two important elements of firm location decisions that have the potential to bias an assessment of the funds: (1) firm"family structure"(in particular, proximity to headquarters for vertically integrated firms), and (2) unobserved spatial heterogeneity (with the potential to confound the effects of the funds). The authors find that the pull of firm headquarters is very strong relative to the constitutional funds for verticallyintegrated firms, but that, with nonparametric controls for time invariant spatial heterogeneity, the funds provide significant incentives for firms in many of the targeted industries.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3843.

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Date of creation: 01 Feb 2006
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Handle: RePEc:wbk:wbrwps:3843
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  1. Daniel da Mata & Uwe Deichmann & J. Vernon Henderson & Somik V. Lall & Hyoung G. Wang, 2005. "Examining the Growth Patterns of Brazilian Cities," Discussion Papers 1113, Instituto de Pesquisa Econômica Aplicada - IPEA.
  2. Levinson, Arik, 1996. "Environmental regulations and manufacturers' location choices: Evidence from the Census of Manufactures," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 5-29, October.
  3. Carlos A. Azzoni & Naercio Menezes-Filho & Tatiana de Menezes & Raúl Silveira-Neto, 2000. "Geography and Income Convergence among Brazilian States," Research Department Publications 3096, Inter-American Development Bank, Research Department.
  4. Afonso Ferreira, 2000. "Convergence in Brazil: recent trends and long-run prospects," Applied Economics, Taylor & Francis Journals, vol. 32(4), pages 479-489.
  5. Lipton, Michael & Ravallion, Martin, 1993. "Poverty and policy," Policy Research Working Paper Series 1130, The World Bank.
  6. Somik V. Lall & Zmarak Shalizi, 2003. "Location and Growth in the Brazilian Northeast," Journal of Regional Science, Wiley Blackwell, vol. 43(4), pages 663-681.
  7. Ellery Junior, Roberto G. & Ferreira, Pedro Cavalcanti, 1995. "Convergencia entre renda per capita dos estados brasileiros," Economics Working Papers (Ensaios Economicos da EPGE) 255, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  8. Jalan, Jyotsna & Ravallion, Martin, 1997. "Spatial poverty traps?," Policy Research Working Paper Series 1862, The World Bank.
  9. Roger Koenker & Kevin F. Hallock, 2001. "Quantile Regression," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 143-156, Fall.
  10. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  11. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
  12. Lall, Somik V. & Funderburg, Richard & Yepes, Tito, 2003. "Location, concentration, and performance of economic activity in Brazil," Policy Research Working Paper Series 3268, The World Bank.
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