This article analyzes the effect of subsidies and awards on the Spanish motion picture industry. We estimate a Cobb-Douglas production function using regional data, showing that it exhibits constant returns to scale and that awards positively affect movie production, while subsidies have no effect. In fact, awards affect the productivity of the sector since they allow for an increase in the output, which is not explained by an increase in inputs.Financial support from the Spanish Ministry
of Education and Science and the Junta de Andalucía through Projects SEJ2007-
62081/ECON and SEJ-2547, respectively

Agnani, Betty

Aray, Henry

English

Repositorio Institucional Universidad de Granada

Subsidies and Awards in Movie ProductionBetty Agnani and Henry ArayyUniversity of GranadaDecember 2008AbstractThis article analyzes the e¤ect of subsidies and awards on theSpanish motion picture industry. We estimate a Cobb-Douglasproduction function using regional data, showing that it exhibitsconstant returns to scale and that awards positively a¤ect movieproduction, while subsidies have no e¤ect. In fact, awards a¤ect theproductivity of the sector since they allow for an increase in the output,which is not explained by an increase in inputs.Key words: Movie production, awards, panel data.JEL Classication: Z11, C23.The authors gratefully acknowledge nancial support from the Spanish Ministryof Education and Science and the Junta de Andalucia through Projects SEJ2007-62081/ECON and SEJ-2547, respectively.yCorresponding Author: Universidad de Granada. Facultad de Ciencias Económicasy Empresariales. Dpto. de Teoría e Historia Económica. Campus de la Cartuja S/N,Granada 18011, Spain. e-mails: bagnani@ugr.es, haray@ugr.es. Phone: +34958241937.Fax: +3495849995.11 IntroductionIn this article we examine the Spanish motion picture industry. Specically,we are interested in testing what e¤ects subsidies and awards may have onSpanish movie production. On the one hand, it is widely known that, in gen-eral, the European movie industry is nancially supported by governments.However, the objective of subsidies does not seem to be clearly settled. Sub-sidies can increase the number of lms and hence achieve higher levels ofproduction and employment in the sector, they can increase the quality ofthe lms or they can make lms more socially and culturally focused. On theother hand, in spite of the importance normally attributed to cinematogra-phy awards, there are no articles in the relevant literature that quantitativelymeasure the impact of awards on movie production in a country with a rel-ative small industry such as Spain.Intuition suggests that awards should have a positive e¤ect on production.Awards could be interpreted as a positive expectation in general by motionpicture producers in a country with a relatively small industry. Domesticand foreign demand for Spanish lms might be expected to rise the moreawards the industry wins, which could in turn imply an increase in box o¢ cetakings for Spanish lms and higher prots for domestic producers. However,the e¤ect of subsidies is not clear a priori, since they can be positive if theobjective is to maintain production and employment, but negative if theobjective is to improve the quality and focus of the lms.The interest and novelty of the present article lies in the fact that itis the rst article to relate subsidies and awards to movie production. Tosome extent, our work could be related to Jansen (2005) who studies therelationship between subsides and prots for the German lm industry andthe works of Nelson et al. (2001) and Deuchert et al. (2005) who studied thee¤ect of Oscar nominations and awards on the nancial success of a movie.The rest of the article is organized as follows. The econometric modeland estimation issues are presented in Section 2. Conclusions are drawn inSection 3.2 Econometric EstimationsWe consider an input augmenting production function model. Therefore, letYt be the production of feature lms at each period t given by a Cobb-Douglas2function asYt = (AtKt) (AtLt) (1)Kt is the physical capital, Lt is the labor input and At is an augmentinginput factor specied asAt = St Pt 1"twhere  is a constant term, St is the total subsidy given by the centralgovernment to the production of feature lms in period t and Pt 1 is thenumber of international awards given to the whole industry in year t 1. Weassume that the e¤ect of awards on movie production has a lag of one yearsince it is natural to expect that this e¤ect is not conveyed in the currentperiod but takes some time. "t is an iid random disturbance.A similar specication of the production function in (1) was used byBergström (2000) to study the e¤ect of subsidies on the performance of rmproductivity. However, this specication has a drawback in that it considersthe labor factor simply as the number of workers or working hours, butignores the skills and capabilities of the workers. In order to overcome thisdrawback we consider a measure of human capital, Nt, dened following Halland Jones (1999)Nt =3Xj=1Lt;jejxj ;where Lt;j is the number of workers with educational level j in the movieproduction industry in period t and with j = 1; 2; 3 accounting for primary,secondary and superior, respectively. xj is the years of each educational level1and j is the rate of return to schooling in Spain according to Lassibille andNavarro (1998). Therefore, instead of (1), we considerYt = (AtKt) (AtNt) (2)When attempting to perform the econometric estimation we face twoproblems. On the one hand, data on subsidies are only available for a shortperiod of time. In order to take advantage of the scarce data available and1We assume the middle point of each range of years of schooling, which are assumedto be constant over time.3to obtain as many observations as possible, we have to use regional dataon movie production and panel data regression. Therefore, we write theproduction function referred to the Spanish region i as follows,Yit = A+it KitNit (3)withNit =3Xj=1Lit;jejxjAit = iSt Pt 1"itOn the other hand, data for physical and human capital inputs are notavailable. Therefore, we have to rely on proxies. For the physical capitalin region i, we use the number of rms involved in the production of atleast one lm in period t. In this sense, each rm is considered as one unit ofphysical capital. Regarding human capital, we have regional-level data on thenumber of workers in the cultural sector 2, which could not be a good proxyfor Lit in the cinema sector. Therefore, we calculate the number of workersin the cinema sector in each region, Lit;j, using the proportion of workers inthe cinema industry at each educational level over the total workers in thecultural sector in the country3.Taking the natural logarithm of (3) and considering the specication ofAit, we obtain the equation to be estimatedLn (Yit) = i + 1Ln (St) + 2Ln (Pt 1) + Ln (Kit) + Ln (Nit) + it (4)withi = (+ )Lni1 = (+ ) 2 = (+ ) it = Ln ("it)2The cultural sector includes employees in museums, theaters, cinema (both exhibitionand production), radio, television, etc.3We assume that this proportion remains constant across regions.4Data from the Spanish Ministry of Culture were used. We consider annualdata for the 2002-2007 period. We have included regions that produced lmsduring the entire period under study. Taken together, these regions accountfor more than 95 percent of movie production in the whole country. Theregions are: Andalusia, Catalonia, Galicia, Madrid, Navarre, the BasqueCountry and Valencia. As the available data on subsidies is given in nominalvalues, the real value, St, referred to euros in the year 2000, is obtained usingthe consumer price index of leisure and culture provided by the SpanishStatistics Institute (INE).Table 1 presents the panel data regression of (4) using the least squaresdummy variable (LSDV) approach to estimate the xed e¤ects (i) whichare not shown. The estimations are robust to heteroskedasticity using acovariance matrix à la White (1980). The results show that all the coe¢ cientsassociated to the explanatory variables are positive. Notice that physical andhuman capital inputs are signicant at the 5% level.Our rst nding is that the production function of the Spanish motionpicture industry exhibits constant returns to scale. This is due to the factthat we test the hypothesis of constant return to scale, H1 (p-values in paren-theses), and are unable to reject it.The second nding concerns the subsidies which have no e¤ect on movieproduction. An explanation could be that the main objective of subsidiesduring the period under study was to improve the quality and focus of thelms instead of stimulating production. In fact, Act 15/2001 alleges argu-ments on cultural grounds to guarantee public funds for the production ofSpanish lms.The third nding is that awards do have a signicant positive e¤ect atthe 5% level. Hence, the more awards won by the Spanish industry in in-ternational lm contests, the higher the production in the sector. This thirdresult supports our initial intuition since awards could be considered goodsignals for the movie industry. In fact, this could be interpreted as a positiveexpectation in general by motion picture producers in a country with a rela-tively small industry. Domestic and foreign demand for Spanish lms mightbe expected to rise, which could imply an increase in box o¢ ce takings forSpanish lms and higher prots for domestic producers.Notice that our results not only suggest that awards positively a¤ectmovie production, but also, and perhaps much more importantly, they a¤ectthe productivity of the sector since they allow for an increase in output,which is not explained by an increase in inputs.5Finally, Table 1 also shows tests of joint signicance of the xed e¤ectsH2 and homogenous e¤ects H3. Both are rejected (p-values in parentheses).Therefore, Spanish regions exhibit heterogeneous xed e¤ects in movie pro-duction which could be interpreted as permanent di¤erences in productivityin movie production across regions.3 ConclusionsThis paper analyzes motion picture production in Spain. Specically, we testthe e¤ect of subsidies and awards on movie production. We use regional dataand panel data regression. We assume a Cobb-Douglas production and ndthat awards have a signicant positive e¤ect on movie production. However,we nd no e¤ect of subsidies. According to the evidence, movie produc-tion in Spain exhibits constant returns to scale and there are di¤erences inproductivity across regions.6References[1] Bergström, F. (2000). Capital Subsidies and the Performance of Firms.Small Business Economics, 14, 183-193.[2] Deuchert, E., Adjamah, K., and F. Pauly. (2005). "For Oscar Glory orOscar Money". Journal of Cultural Economics, 29, 159-176.[3] Hall, R. E. and C. I. Jones. (1999). Why do Some Countries Produce soMuch More Output per Worker than Others?. The Quarterly Journal ofEconomics, 114, 1, 83-116.[4] Jansen, C. (2005). The Performance of German Motion Pictures, Protsand Subsidies: Some Empirical Evidence. Journal of Cultural Economics29, 191-212.[5] Lassibille, G. and L. Navarro Gómez. (1998). The Evolution of Returnsto Education in Spain 1980-1991. Education Economics, 6, 1, 3-9.[6] Nelson, R.A., Donihue, R., Waldman, D.M. and C. Wheaton. (2001).Whats an Oscar Worth?. Economic Inquiry, 39 (1), 1-16.[7] White, H. (1980). A Heteroskedasticity-Consistent Covariance Matrix Es-timator and A Direct Test for Heteroskedasticity. Econometrica, 48, 817-838.7Table 1. Panel Data Regression with Fixed E¤ectsCoe¢ cients Standard ErrorsLn (St) 0.0298 0.0921Ln (Pt 1) 0.5335 * 0.1951Ln (Kit) 0.7234 * 0.0541Ln (Nit) 0.3422 ** 0.1422R2 0.9859DW 2.2904H1 0.2618(0.6089)H2 67.7379(0.0000)H3 56.9975(0.0000) () Sign icant at 1% (5% )8

Subsidies and awards in movie production

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