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This paper examines the job creation effects of state and local non-tax incentives for capital investment, which are relatively understudied in the literature. The paper's primary contribution is the creation of an Incentive Environment Index (IEI) from state constitutional provisions that limit and structure the ability of state and local governmental entities to aid private enterprises. Comparing estimation results across methods reveals that unobserved heterogeneity results in overstatement of policy effects. The most robust estimates indicate that increasing the ability of governments to aid private enterprise has a signifcant negative medium-term effect on rural county employment levels but otherwise has no effect on employment levels or growth.

Using incentives to attract firms is the primary economic development policy for many local governments. Yet, relatively little is known about the local economic development outcomes induced by successful attraction of new establishments. The empirical challenge lies in correctly identifying the counterfactual outcome. This article tests for induced economic development in winning counties using a set of highly incentivized large plants. The article makes a methodological contribution by comparing difference-in-differences results from a natural experiment (in which counterfactuals are losers reported by Site Selection magazine) with a geographically proximate matching control by design strategy. Estimates are sensitive to identification strategy, with distributional and placebo tests suggesting geographically proximate matching as preferable to the natural experiment. The preferred estimates indicate successful attraction of a large new plant induces modest increases in new economic activity that does not generate fiscal surplus for winning counties. (JEL R11, R31, H71, O18)

Using tax abatements, financial incentives, and public investments to attract (or retain) firms is the primary economic development tool for many local governments. Often local job creation policies focus on increasing capital through grants, low-interest financing, and other economic development incentives. Theory predicts that capital subsidies induce firm behaviors that limit their job creation effects. This paper employs the Incentives Environment Index, constructed from state constitutional provisions that limit and structure the ability of state and local governmental entities to aid private enterprises, and five-year county panels to test theoretical predictions on county capital expenditure and input mixes as well as industry establishment shares. The results indicate the act of increasing capital subsidy tools is associated with capital-labor substitution, decreased employment density, and changes in local industry mix. Results are robust to alternative empirical specifications and measures of capital subsidy availability. JEL Classification Codes: R32, H25, R11

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