The Persistent Effects of Place-Based Policy: Evidence from the West-German Zonenrandgebiet

Using a natural experiment, we show that temporary place-based subsidies generate persistent effects on economic density. The spatial regression discontinuity design controls for continuous local agglomeration externalities, so we attribute an important role to capital formation in explaining persistent spatial patterns of economic activity. This persistence is driven by higher local public investment levels, which local governments could maintain after the end of the program because of a persistently higher tax base. We also find evidence for significant local relocation of economic activity, which raises doubts that the net effect of the policy is positive. Finally, we show that transfers have capitalized in land rents such that pretreatment land owners have benefited from the program.