Sarah Fritz (Halle Institute for Economic Research)
Catherine Van Der List
We study the medium- to long-term effects of place-based policies on aggregate productivity using administrative data on the universe of projects co-financed by the EU in Italy linked to firm balance sheet data. We exploit quasi-experimental variation in EU funding for a large place-based policy stemming from measurement error in regional GDP estimates. Results show that the program decreases labor productivity of regions receiving investments. Decomposing the change reveals that the aggregate productivity declines are driven by reallocation of labor to low-productivity firms, particularly in the manufacturing sector. Analysis of the mechanism using firm-level event studies reveals that the negative labor reallocation effects are caused by high-productivity firms investing in capital and automation and subsequently reducing their employment.