DP945 The Political Economy of State Aids in the European Community: Some Econometric Evidence

Author(s): Damien J Neven
Publication Date: April 1994
Keyword(s): Capture, European Community, Political Economy, State Aids
JEL(s): H20, L50, L51
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=945

This paper analyses the pattern of state aids to the manufacturing sector in ten EC countries for the period 1981--90. It focuses on determinants suggested by the political economy of state aids. We estimate a regression model where the intensity of state aids is accounted for by the weakness of government, their ideological orientation, the concentration of industry, and the timing of elections. The evidence indicates that the fractionalization of political parties is associated with higher state aids. We also find support for the view that state aids are higher under right-wing governments and when firms' interests are highly concentrated. This is consistent with a partisan view of government in which firms represent an important constituency for right-wing coalitions. By contrast, the timing of elections does not seem to matter. Finally, the paper observes significant fixed country effects. We gather evidence on the transparency of procedures used to allocate and control state aids and suggest that these fixed effects could be associated with lax procedures which enhance the scope for capture.