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Subsidizing the Unknown: The Hidden Trade-offs in Europe's AI Support Schemes

Author

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  • Dietrich, Diemo
  • Gehrig, Thomas
  • Stenbacka, Rune

Abstract

The European Commission's AI Action Plan commits over EUR 30\,billion to foster AI innovation while ensuring compliance with the regulatory framework established by the AI Act. Promoting capability development and enforcing compliance creates a dual mandate that may generate tensions. To analyse these challenges, we develop a micro-founded model of an AI developer who makes three sequential choices: capability quality, compliance evaluation intensity, and irreversible deployment infrastructure. Its behaviour partitions into three regimes: abstention, signal-contingent scaling, and unconditional scaling. Compute and training subsidies increase capability quality but may suppress compliance evaluation. In contrast, compliance evaluation support, such as the AI Act Service Desk, expands the signal-contingent regime. Infrastructure co-investment then risks inducing unconditional scaling. These results highlight the challenge of aligning EU AI support schemes with the objectives of the AI Act.

Suggested Citation

  • Dietrich, Diemo & Gehrig, Thomas & Stenbacka, Rune, 2026. "Subsidizing the Unknown: The Hidden Trade-offs in Europe's AI Support Schemes," CEPR Discussion Papers 21942, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21942
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    File URL: https://cepr.org/publications/DP21942
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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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