Industrial policy is on the rise. However, empirical evidence of how industrial policy shapes technological progress and productivity remains scarce. This paper examines a policy that aimed at boosting industry-wide productivity by subsidizing plant closures in the declining German coal mining industry. Based on newly digitized, mine-level production data, my findings indicate that the policy increased long-run productivity in three distinct ways: First, it facilitated the exit of low-productivity mines. Second, it triggered reallocation towards large, productive mines, especially in firms where the subsidy alleviated financial constraints. Third, firms invested parts of the policy-induced subsidies into machinery and infrastructure of surviving mines. The resulting within-mine productivity gains extended mines’ lifespan by six years. In total, the associated reduction in marginal cost exceeded the government subsidies.