production and turn around less developed areas. The New Industrial Policy of Uttarakhand could be a similar case in point.

However, it is challenging to separately identify agglomeration economies from the general impact of place-based policies when long-term data with sufficient post-intervention observations are not available. Both channels can lead to concentration of firms in the same sector in the targeted area. We circumvent this challenge by assessing spillovers between industries. Following Ellison, Glaeser and Kerr (2010), we construct the coagglomeration index measuring the overall tendency that two industries locate in proximity, and indices measuring two Marshallian mechanisms for spillovers, namely, input-output linkages and labor pooling, that can give rise to agglomeration across industries. We show that the industrial tendency for colocation leads to employment gains in sectors that were not directly incentivized by the New Industrial Policy. We find that controlling for the direct effects, sectors with labor requirements similar to those receiving excise tax incentives experience an additional increase in employment as one crosses the border from Uttar Pradesh to Uttarakhand, while sectors sharing a labor pool with those not receiving incentives see a decline in employment.

A legitimate concern regarding the significant job growth estimated in Uttarakhand is the potential displacement effect on the Uttar Pradesh side. The Economic Census data are not well suited to directly study firm closure and relocation, the data are cross sectional in nature and do not report the age of firms. We partly address this concern by assessing the growth in the number of firms using all three rounds of Economic Censuses. We show that the growth in firm number stays relatively stable in the bordering places in Uttar Pradesh in the periods before (1990-1998) and (1998-2013) after to the New Industrial Policy. In contrast, we find that the growth in the number of firms increased significantly for the comparable places on the Uttarakhand side of the border. While we cannot fully rule out the displacement effect completely, we take these results as evidence that the significant employment growth due to the policy is not fully driven by the relocation of firms from Uttar Pradesh to Uttarakhand at the border.

Overall, we verify the local channels by which a large place-based policy in India impacts net job creation and firm location. We show the impact takes place through both direct and indirect channels, highlighting the role of agglomeration economies at play. However, owing to data limitation, our analysis sheds light only on the local development impacts of the policy and cannot address the nation-wide net costs and benefits of the New Industrial Policy generated for India as a whole.

This paper extends a strand of relatively new literature evaluating the impacts of place-based policies in developing countries. Most of these existing studies focus on China. In the case of India, Chaurey (2017) uses the Annual Survey of Industries to study the central tax incentives targeting Himachal Pradesh and Uttarakhand, and Shenoy (2018) takes nighttime light data as a proxy of economic activities to investigate a broader set of interventions targeting Uttarakhand. Our analysis complements these studies by exploring firm-level data that have both a more comprehensive coverage (manufacturing and services sectors, formal and informal) and a finer spatial granularity (town and village level instead of district level).

Our research design requires weaker assumptions than much of the prior literature based on differencein-differences estimation—which is the case of Chaurey (2017) — and explores sectoral heterogeneity to assess the impact of fiscal incentives. In doing so, this paper also builds on a large literature studying the impact of taxes on business location decisions (Duranton, Gobillon and Overman 2011; Holmes 1998; Rohlin, Rosenthal and Ross 2014). Another innovative aspect of the design is that we verify the impact of agglomeration economies by looking at spillovers between industries. We provide another piece of 5