Place-Based Policies, Local Responses, and Electoral Behavior

This is the authors' abstract. We don't add key points for this paper.

Place-based economic policies are increasingly seen as instruments to counter political discontent in economically-depressed regions. Do regional investment subsidies affect electoral behavior? We evaluate this question in the context of Germany's largest regional investment program. Our identification strategy leverages a 2014 subsidy rate cut for manufacturing firms that -- due to EU rules -- was exogenous to local economic trends. The subsidy cut reduced voting for the far-right AfD and increased support for the incumbent Christian Democrats. We then demonstrate that subsidy cuts trigger two counterreactions: local firms invest more in human capital and local governments invest more in infrastructure and public goods. We argue that these dynamics signal to voters that local governments are responsive and care about their constituents, undermining populist appeals. Our findings suggest that political consequences of place-based policies -- and austerity more broadly -- cannot be understood without considering counteractions by local firms and governments.