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Making Subsidies Work: Rules vs. Discretion

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  • Cingano, Federico
  • Palomba, Filippo
  • Pinotti, Paolo
  • Rettore, Enrico

Abstract

We estimate the employment effects of a large program of public investment subsidies that ranked applications on a score reflecting both objective criteria and local politicians' preferences. Leveraging the rationing of funds as an ideal RDD, we characterize the heterogeneity of treatment effects and cost-per-new-job across inframarginal firms, and we estimate the cost effectiveness of subsidies under factual and counterfactual allocations. Firms ranking high on objective criteria and firms preferred by local politicians generated larger employment growth on average, but the latter did so at a higher cost-per-job. We estimate that relying only on objective criteria would reduce the cost-per-job by 11%, while relying only on political discretion would increase such cost by 47%.

Suggested Citation

  • Cingano, Federico & Palomba, Filippo & Pinotti, Paolo & Rettore, Enrico, 2022. "Making Subsidies Work: Rules vs. Discretion," CEPR Discussion Papers 17004, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17004
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    2. Santoleri, Pietro & Russo, Emanuele, 2025. "Spurring subsidy entrepreneurs," Research Policy, Elsevier, vol. 54(1).
    3. Chiappinelli, Olga & Giuffrida, Leonardo M. & Spagnolo, Giancarlo, 2025. "Public procurement as an innovation policy: Where do we stand?," International Journal of Industrial Organization, Elsevier, vol. 100(C).
    4. Kinga B. Tchorzewska, 2024. "A Lost Opportunity? Environmental Investment Tax Incentive and Energy Efficient Technologies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(12), pages 3301-3333, December.
    5. Vincenzo Cuciniello & Claudio Michelacci & Luigi Paciello, 2025. "Subsidizing Business Entry in Competitive Credit Markets," Journal of Political Economy, University of Chicago Press, vol. 133(11), pages 3652-3711.
    6. Matilde Cappelletti & Leonardo M. Giuffrida & Gabriele Rovigatti, 2024. "Procuring Survival," Journal of Industrial Economics, Wiley Blackwell, vol. 72(4), pages 1451-1506, December.
    7. Monica Andini & Alessio D'Ignazio, 2025. "Impact assessment of the tax credit for investments in Southern Italy in the period 2016-2020," Temi di discussione (Economic working papers) 1487, Bank of Italy, Economic Research and International Relations Area.
    8. Brunello, Giorgio & Bertoni, Marco & De Paola, Maria & Cappellari, Lorenzo, 2025. "The long run earnings effects of winning a mayoral election," Journal of Economic Behavior & Organization, Elsevier, vol. 240(C).
    9. Alexandre, Fernando & Chaves, Miguel & Portela, Miguel, 2022. "Investment Grants and Firms' Productivity: How Effective Is a Grant Booster Shot?," IZA Discussion Papers 15779, Institute of Labor Economics (IZA).
    10. Cingano, Federico & Palomba, Filippo & Pinotti, Paolo & Rettore, Enrico, 2023. "Granting more bang for the buck: The heterogeneous effects of firm subsidies," Labour Economics, Elsevier, vol. 83(C).
    11. Mergele, Lukas & Hennicke, Moritz & Lubczyk, Moritz, 2025. "The big sell: Privatizing East Germany’s economy," Journal of Public Economics, Elsevier, vol. 242(C).
    12. Stefano Iandolo & Anna Maria Ferragina, 2023. "Innovate to Resist: Are Innovators Shielded from External Shocks?," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 9(3), pages 997-1025, November.

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    Keywords

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies

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