The effects of LCC subsidies on the tourism industry

This paper studies the relationship between aviation, tourist flows, and subsidies to Low–Cost Carriers (LCCs), a policy tool used by many national and local governments to stimulate tourist arrivals. To evaluate this policy’s impact, we estimate a two–stage empirical model. In the first stage, we estimate a structural model applied to air transport; in the second stage, we estimate the link between passenger flows and regional tourism flows. In this way, we use exogenous aviation shocks (subsidies to LCCs) to analyze the causal effect on tourist arrivals. This model is estimated using data on aviation and tourist flows from European to Italian regions during 2016–2018. Counterfactual analyses consider different regimes for implementing the policy, i.e., a subsidy adopted by a benevolent central planner and/or by sub–national institutions. Our simulations show that subsidies to LCCs are effective in stimulating tourism and that a centralized regime is more effective than a decentralized one. In fact, the latter generates externalities in regions that do not implement the subsidy, making the decentralized policy economically suboptimal.