The Effectiveness of Tax Incentives

The contribution of this work is the empirical understanding of the effectiveness of Puerto Rico’s investment incentive program, after the local government divided the island into three zones: High, Intermediate, and Low Industrials zone. Traditionally, Conditional Logit (CL) has been the methodology used for firm location analysis. However, CL confronts several limitations, and for that reason, the book follows a Poisson Regression analysis. This methodology will give the same results as the CL model and, in certain cases related to location decisions, is a better approach since it handles more properly the limitations inherent in the CL methodology.The analysis shows that firms tend to locate in a statistically significant fashion at the intermediate industrial zone. Furthermore, based on a Shift-Share analysis, job expansion at both the intermediate and low zones is significantly higher than what would have occurred if these zones would have grown at the same rate of the high industrial zone.