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The Relative Efficiency of Automatic and Discretionary Regional Aid

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  • J Kim Swales

    (Fraser of Allander Institute, Department of Economics, University of Strathclyde, Sir William Duncan Building, 130 Rottenrow, Glasgow G4 0GE, Scotland)

Abstract

Discretionary subsidies are the primary instruments for regional policy in Europe. Such aid is typically targeted at ‘additional’ projects: that is, projects that would not have been implemented without the subsidy, with the subsidy set at the minimum for the project to be implemented. This contrasts to automatic subsidies, where many of the aided projects are nonadditional and all eligible projects receive the same subsidy rate. The present paper builds on previous studies to compare three subsidy schemes: an automatic scheme and two types of discretionary scheme, one with accurate appraisal and the other with appraisal error. These schemes are assessed on their expected welfare impacts. The particular focus is the reduction in welfare gain imposed by the interaction of appraisal error and the requirements for accountability. This is potentially substantial and difficult to detect with conventional evaluation techniques.

Suggested Citation

  • J Kim Swales, 2010. "The Relative Efficiency of Automatic and Discretionary Regional Aid," Environment and Planning A, , vol. 42(2), pages 434-451, February.
    • Handle: RePEc:sae:envira:v:42:y:2010:i:2:p:434-451
    DOI: 10.1068/a41342
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    References listed on IDEAS

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    1. Giebe, Thomas & Grebe, Tim & Wolfstetter, Elmar, 2006. "How to allocate R&D (and other) subsidies: An experimentally tested policy recommendation," Research Policy, Elsevier, vol. 35(9), pages 1261-1272, November.
    2. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    3. Gary Gillespie & Peter Mcgregor & J. Kim Swales & Ya Ping Yin, 2001. "The Displacement and Multiplier Effects of Regional Selective Assistance: A Computable General Equilibrium Analysis," Regional Studies, Taylor & Francis Journals, vol. 35(2), pages 125-139.
    4. Colin Wren, 2005. "Regional grants: are they worth it?," Fiscal Studies, Institute for Fiscal Studies, vol. 26(2), pages 245-275, June.
    5. Swales, J. Kim, 2008. "The Relative Efficiency of Automatic and Discretionary Industrial Aid," SIRE Discussion Papers 2008-50, Scottish Institute for Research in Economics (SIRE).
    6. Kim Swales, 1997. "A cost-benefit approach to the evaluation of regional selective assistance," Fiscal Studies, Institute for Fiscal Studies, vol. 18(1), pages 73-85, February.
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