Industrial policy persistence and local economic performance: The role of subsidy allocation in China

Abstract

The persistence of economic policies is crucial for their effectiveness and economic outcomes. However, debates on industrial policy effectiveness have primarily focused on policy tools and target sectors, with little attention given to policy persistence. This paper addresses this gap by evaluating how policy persistence during subsidy implementation affects policy effectiveness. We measure policy persistence using cosine similarity between vectors reflecting the cross-industry distribution of subsidies over consecutive years and instrument it with the occurrence of abrupt public safety incidents. Our results reveal a significantly positive effect of subsidy allocation persistence on local economic performance. This effect is stronger when local governments are influential or industries need consistent government support and weaker when policy changes are more predictable or local officials are less prone to decision-making mistakes. We further provide micro-level evidence showing that the persistence of industrial policies impacts local economic performance by influencing the activities of local businesses.