Cascades of Tax Policy Through Production Networks: Evidence From Japan

ABSTRACT This paper estimates the indirect effects on firm performance of tax incentives for investment through production networks. It exploits the quasi‐experimental event of an investment stimulus policy targeting small and medium‐sized enterprises, along with unique proprietary data of supply chains in Japan. I find that the indirect effects on large direct suppliers might surpass the direct effects, while no discernible effects are found on downstream firms. These findings suggest the limitations of size‐contingent policies on firms due to the influence of production networks.