Place-Based Policies

CHAPTER 18 Place-Based Policies David Neumark*, Helen Simpson† *UCI, NBER, and IZA, Irvine, CA, USA †University of Bristol, CMPO, OUCBT and CEPR, Bristol, UK Contents 18.1. Introduction 1198 18.2. Theoretical Basis for Place-Based Policies 1206 18.2.1 Agglomeration economies 1206 18.2.2 Knowledge spillovers and the knowledge economy 1208 18.2.3 Industry localization 1209 18.2.4 Spatial mismatch 1210 18.2.5 Network effects 1211 18.2.6 Equity motivations for place-based policies 1212 18.2.7 Summary and implications for empirical analysis 1213 18.3. Evidence on Theoretical Motivations and Behavioral Hypotheses Underlying Place-Based Policies 1215 18.3.1 Evidence on agglomeration economies 1215 18.3.2 Is there spatial mismatch? 1217 18.3.3 Are there important network effects in urban labor markets? 1219 18.4. Identifying the Effects of Place-Based Policies 1221 18.4.1 Measuring local areas where policies are implemented and economic outcomes in those areas 1222 18.4.2 Accounting for selective geographic targeting of policies 1222 18.4.3 Identifying the effects of specific policies when areas are subject to multiple interventions 1225 18.4.4 Accounting for displacement effects 1225 18.4.5 Studying the effects of discretionary policies targeting specific firms 1226 18.4.6 Relative versus absolute effects 1229 18.5. Evidence on Impacts of Policy Interventions 1230 18.5.1 Enterprise zones 1230 18.5.1.1 The California enterprise zone program 1230 18.5.1.2 Other recent evidence for US state-level and federal programs 1237 18.5.1.3 Evidence from other countries 1246 18.5.1.4 Summary of evidence on enterprise zones 1249 18.5.2 Place-based policies that account for network effects 1250 18.5.3 Discretionary grant-based policies 1252 18.5.3.1 Summary of evidence on discretionary grants 1259 18.5.4 Clusters and universities 1261 18.5.4.1 Clusters policies 1261 18.5.4.2 Universities 1264 18.5.4.3 Summary of evidence on clusters and universities 1267 Handbook of Regional and Urban Economics,Volume5B © 2015 Elsevier B.V. ISSN 1574-0080, http://dx.doi.org/10.1016/B978-0-444-59531-7.00018-1 All rights reserved. 1197 1198 Handbook of Regional and Urban Economics 18.5.5 Infrastructure investment and other regional policies 1268 18.5.6 Community development and locally led initiatives 1275 18.6. Unanswered Questions and Research Challenges 1279 Acknowledgments 1282 References 1282 Abstract Place-based policies commonly target underperforming areas, such as deteriorating downtown business districts and disadvantaged regions. Principal examples include enterprise zones, European Union Structural Funds, and industrial cluster policies. Place-based policies are rationalized by various hypotheses in urban and labor economics, such as agglomeration economies and spatial mismatch— hypotheses that entail market failures and often predict overlap between poor economic performance and disadvantaged residents. The evidence on enterprise zones is very mixed. We need to know more about what features of enterprise zone policies make them more effective or less effective, who gains and who loses from these policies, and how we can reconcile the existing findings. Some evidence points to positive benefits of infrastructure expenditure and also investment in higher education and university research—likely because of the public-goods nature of these policies. However, to better guide policy, we need to know more about what policies create self-sustaining longer run gains. Keywords Place-based policies, Employment, Enterprise zones, Discretionary grants, Higher education, Industrial clusters, Infrastructure JEL Classification Codes R12, R38, J68, H25 18.1. INTRODUCTION Broadly speaking, place-based policies refer to government efforts to enhance the economic performance of an area within its jurisdiction, typically in the form of more job opportunities and higher wages. Best known, perhaps, are place-based policies that target underperforming areas, such as deteriorating downtown business districts or, within the European Union, relatively disadvantaged areas eligible for regional development aid. Alternatively, place-based policies may seek to enhance even further the economic performance of areas that are already doing well. Ladd (1994) distinguished a subset of place-based policies or strategies that she labeled “place-based people strategies.” These are policies that are geographically targeted, but with the intent and structure of helping disadvantaged residents in them—for example, enterprise zone programs that seek to create jobs in or near areas where poor people live and job prospects are weak. In contrast, some place-based policies target areas irrespective of whether there are disadvantaged people living in those areas, or even many people at Place-Based Policies 1199 all, such as efforts to revitalize a downtown business district including real-estate development or initiatives to help strengthen an industrial cluster in a region. Place-based people strategies, in particular, can be contrasted with “people-based” policies that try to help the disadvantaged without regard to where they live or how con- centrated they are. Examples include welfare and working tax credits (such as the earned income tax credit in the United States). People-based policies are the more traditional purview of public finance and are not covered in this chapter. Rather, the chapter focuses on a wide range of place-based policies—including pure place-based policies and place- based people policies. Place-based policies that also focus on people can be categorized as direct or indirect. Direct forms of place-based policies seek to increase economic activity and strengthen labor markets where disadvantaged people currently live, while indirect policies may instead seek to increase access of those people to locations where labor markets are stron- ger. Enterprise zones can be viewed as direct, since they typically create incentives for hiring, or economic activity more generally, in or near areas where disadvantaged people live. The Gautreaux Project and Moving to Opportunity program in the United States, as well as transportation-based policies intended to increase access to jobs outside of areas where the disadvantaged tend to reside (in the United States, the urban core)—that is, intended to reduce spatial mismatch—are examples of indirect policies. However, this chapter focuses on direct policies.1 Place-based policies targeting the disadvantaged, including indirect policies, are often rationalized in part by hypotheses that seek to explain the overlap between areas with poor economic performance and disadvantaged residents, coupled with market failures of one form or another. The standard arguments considered in the urban economics literature to rationalize pure place-based policies are generally efficiency arguments per- taining to the existence of agglomeration externalities. But this literature also calls into question whether policies that aim to stimulate economic activity in one place rather than another deliver any aggregate benefits and whether place-based people policies will ultimately help those individuals they target. In our view, other market imperfections that have been highlighted in the labor economics literature may also justify place-based policies of both types. One is the spatial mismatch hypothesis, wherein minorities or low-skilled workers in some urban areas may face long-term disadvantage spurred by declines in employment opportunities as manufacturing jobs left the cities, coupled with housing discrimination or other constraints that restrict their mobility to locations with better employment opportunities. A second is positive externalities stemming from network effects, whereby employment 1 There are many excellent summaries of the details of both the Gautreaux Project and MTO program designs, and there are a number of comprehensive reviews of findings of studies of either or both programs; see, e.g., Duncan and Zuberi (2006), Rosenbaum and Zuberi (2010), and Ludwig et al. (2013). 1200 Handbook of Regional and Urban Economics of residents can help other residents find jobs (e.g., Hellerstein et al., 2011). Either the externalities from network effects or the mobility constraints implied by spatial mismatch can potentially justify geographically targeted policies to increase employment. This chapter reviews evidence on these labor-market hypotheses that can potentially rationalize place-based policies, with a more cursory discussion of the standard urban economics hypotheses regarding agglomeration and spillovers, on which plenty of work already exists. The majority of the chapter focuses on the research evidence on impacts of place- based policies and discusses issues arising in the empirical identification of causal effects in this setting.2 In the remainder of this section, we provide more details on the types of place-based policies we consider and emphasize the intended recipients and the stated goals of these policies. Later in the chapter, in both the context of the theoretical basis for these interventions and the evidence on their effects, we consider whether these goals are met. Due to space constraints, we limit our coverage throughout to place-based policies in the United States and in Europe. This focus allows us to contrast evidence on similar types of policies implemented in both locations and, where the evaluation literature has examined comparable outcomes using similar empirical approaches, enables us to draw conclusions

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