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Making Subsidies Work: Rules vs. Discretion

Author

Listed:
  • Federico Cingano

    (Federico Cingano)

  • Paolo Pinotti

    (Paolo Pinotti)

  • Enrico Rettore

    (Enrico Rettore)

  • Filippo Palomba

    (Filippo Palomba)

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

  • Federico Cingano & Paolo Pinotti & Enrico Rettore & Filippo Palomba, 2022. "Making Subsidies Work: Rules vs. Discretion," RF Berlin - CReAM Discussion Paper Series 2207, Rockwool Foundation Berlin (RF Berlin) - Centre for Research and Analysis of Migration (CReAM).
    • Handle: RePEc:crm:wpaper:2207
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    Cited by:

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    3. Marco Bertoni & Giorgio Brunello & Lorenzo Cappellari & Maria De Paola, 2023. "The long-run earnings effects of winning a mayoral election," DISCE - Working Papers del Dipartimento di Economia e Finanza def123, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    4. Vincenzo Cuciniello & Claudio Michelacci & Luigi Paciello, 2023. "Subsidizing business entry in competitive credit markets," Temi di discussione (Economic working papers) 1424, Bank of Italy, Economic Research and International Relations Area.
    5. 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).

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    More about this item

    Keywords

    Public subsidies; investment; employment; political discretion; regression discontinuity;
    All these keywords.

    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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