IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The Optimal State Aid Control: No Control

We extend a model of wasteful state aid in Dewatripont and Seabright (2006, Journal of the European Economic Association 4, 513--522) by a supranational controlling authority. The model combines moral hazard and adverse selection to show that politicians fund wasteful projects to signal their effort. Voters, unable to observe project benefits or effort, reward funding with a reelection premium that separates a high-effort politician from a low-effort politician. We examine state aid control by a benevolent authority which receives extra signals about the state of the world. We find that signals on the politician type are worthless. For signals on the project type, we derive a sufficient condition for aid control to unambiguously decrease welfare. We also prove that politicians do not respond to marginal changes in incentives. In this setup, the optimal state aid control is fairly often no control.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2009/14.

in new window

Length: 21 pages
Date of creation: Mar 2009
Date of revision: Mar 2009
Handle: RePEc:fau:wpaper:wp2009_14
Contact details of provider: Postal:
Opletalova 26, CZ-110 00 Prague

Phone: +420 2 222112330
Fax: +420 2 22112304
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Mathias Dewatripont & Paul Seabright, 2006. ""Wasteful" Public Spending and State Aid Control," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 513-522, 04-05.
  2. Poutvaara, Panu & Takalo, Tuomas, 2007. "Candidate quality," Munich Reprints in Economics 19785, University of Munich, Department of Economics.
  3. Robinson, James A & Torvik, Ragnar, 2002. "White Elephants," CEPR Discussion Papers 3459, C.E.P.R. Discussion Papers.
  4. Gersbach, Hans, 2004. "Competition of Politicians for Wages and Office," CEPR Discussion Papers 4261, C.E.P.R. Discussion Papers.
  5. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
  6. David R Collie, 2005. "State aid to investment and R&D," European Economy - Economic Papers 2008 - 2015 231, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  7. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
  8. Candel-Sanchez, Francisco, 2007. "Incentives for budget discipline in the presence of elections," European Journal of Political Economy, Elsevier, vol. 23(4), pages 863-884, December.
  9. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
  10. Georges Casamatta & Caroline De Paoli, 2007. "Inefficient Public Provision in a Repeated Elections Model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(6), pages 1103-1126, December.
  11. Philip Keefer & Stephen Knack, 2007. "Boondoggles, Rent-Seeking, and Political Checks and Balances: Public Investment under Unaccountable Governments," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 566-572, August.
  12. Barbara J. Spencer & James A. Brander, 1983. "International R & D Rivalry and Industrial Strategy," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 707-722.
  13. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Entry and asymmetric lobbying: why governments pick losers," LSE Research Online Documents on Economics 19726, London School of Economics and Political Science, LSE Library.
  14. Hans Gersbach, 2004. "The money-burning refinement: With an application to a political signalling game," International Journal of Game Theory, Springer;Game Theory Society, vol. 33(1), pages 67-87, January.
  15. Adi Brender & Allan Drazen, 2008. "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Panel of Countries," American Economic Review, American Economic Association, vol. 98(5), pages 2203-20, December.
  16. Costas Roumanias, 2005. "Signaling Through Political Campaigns: Elections As A Revelation Mechanism," Economics and Politics, Wiley Blackwell, vol. 17(3), pages 367-392, November.
  17. Karen Helene Midelfart-Knarvik & Henry G. Overman, 2002. "Delocation and European integration: is structural spending justified?," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 321-359, October.
  18. Drazen, Allan & Eslava, Marcela, 2010. "Electoral manipulation via voter-friendly spending: Theory and evidence," Journal of Development Economics, Elsevier, vol. 92(1), pages 39-52, May.
  19. Timothy Besley & Paul Seabright, 1999. "The effects and policy implications of state aids to industry: an economic analysis," Economic Policy, CEPR;CES;MSH, vol. 14(28), pages 13-53, 04.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fau:wpaper:wp2009_14. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lenka Herrmannova)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.