The Political Consequences of Place Based Policies in Germany

• In Event: Political Economy in Geographic Space

Abstract

Rising inequalities between booming urban centers and declining peripheries is one of the key challenges facing many rich democracies, threatening social cohesion and fueling political polarization. In response, many governments have enacted place-based policies to enhance the economic performance of depressed regions.

In this paper, we study the political effects of Germany’s largest place-based investment policy.
The policy aims to rejuvenate the East German economy post-reunification by providing investment subsidies to manufacturing firms in underdeveloped areas. We focus on an exogenous reform between 2013 and 2017, which cut the maximum subsidy rate for investments in manufacturing firms in some counties but not others.

Using a difference-in-differences design with fine-grained administrative data on firm-level subsidy rates, we demonstrate that cuts do not affect turnout and voting for the Social Democrats in federal elections. The Christian-Conservatives and Greens loose votes, while the Alternative for Germany gains votes. We further present evidence on mechanisms using individual-level panel survey data. Our findings suggest that sustained government investment in regions grappling with economic disparities can help mitigate political radicalization.

Authors

• Vincent Heddesheimer, Princeton University

• Hanno Hilbig, UC Davis

• Andreas Wiedemann, Princeton University