Tax breaks for incentive pay, productivity and wages: Evidence from a reform in Italy

This paper analyses the impact of a tax break on incentive pay (introduced in Law n. 208/2015) on labour productivity and average wages in Italian firms. We use a unique source of firm-level information drawn from a large representative survey of Italian firms merged with the ORBIS archive. By applying difference-in-differences methods, we obtain the following results. First, the tax break has a positive effect on both labour productivity and average wages, although the positive effect on average wages is not confirmed by robustness tests. Second, productivity impacts are mainly driven by family firms in northern regions, where firms benefit from the more dynamic business environment in which they operate. These results take into account unobserved heterogeneity and endogeneity issues.